Taxation of investment funds - dioceses and churches should pay attention to these aspects

New rules for the taxation of investment funds have been in force since the beginning of 2018. One important change is the introduction of a tax liability for investment funds on certain fund income. So that this taxation does not become definitive for tax-exempt investors such as dioceses and regional churches, the so-called transparency option can be exercised for special funds. Dioceses and regional churches must then fulfil more extensive tax declaration obligations. 

As a result of the reform of investment fund taxation, investment funds with German dividends and real estate income have themselves been subject to a tax of 15 per cent since 2018. In the case of German dividends, this is levied by deducting capital gains tax. In the case of special funds, the so-called transparency option can be exercised by the investor or the fund company. In this case, the German dividends are directly attributed to the investors of the special fund for tax purposes, even if they actually accrue to the special fund. This also means that the withholding of capital gains tax is omitted insofar as a tax-exempt investor such as a diocese or a regional church participates in the special fund. Exercising the transparency option is therefore advantageous for dioceses and regional churches because German dividends can be received without tax deduction. However, dioceses and regional churches should note that exercising the transparency option results in tax obligations at their level which would otherwise have remained with the special fund or its fund company. 

When exercising the transparency option, it is the responsibility of the investors to ensure that the requirements of § 36a EStG are met. Dioceses and regional churches must independently verify whether the German shares underlying the dividends were held in the special fund's portfolio for at least one year prior to the dividend payment or, if this is not fulfilled, whether the shares were held for at least 45 days around the dividend record date and a certain risk of change in value was observed. If these conditions are not met, the investor is obliged to notify the tax office and pay tax. In this case, the investor must make a tax payment in the amount of the omitted or refunded tax deduction.

Do you have any questions on this topic? Please do not hesitate to contact our tax experts.