Fund Taxation Alert 2025-15

Senior Manager, Financial Services Tax
KPMG in Luxembourg

Email

Phone

In the first half of 2026, we expect the Cologne Tax Court to issue its decision on the KPMG-led test case, which was initiated to clarify how EU law applies to discriminatory treatment in the German investment tax regime following the entry into force of the German Investment Tax Act (GInvTA) in 2018.

This test case follows the landmark ruling by the German Federal Fiscal Court (BFH) in the KPMG tax cases (IR 01/20 and IR 02/20). The ruling confirmed that Germany’s tax regime was discriminatory against EU-law until 31 December 2017. (see latest newsletter: Fund Taxation Alert 2025-08 - KPMG Luxembourg).

The GInvTA, effective from 1 January 2018, was introduced to align the taxation of investment funds with EU principles and ensure equal treatment of domestic and foreign funds.

Under this reform, all investment funds whether German or foreign are treated as opaque entities and subject to 15% withholding tax (WHT) on German-source dividends at the fund level (or 26.375% without a valid German status certificate).

At the same time, Germany introduced partial tax exemptions for domestic investors (e.g. 30% for private investors in equity funds under §20 GInvTA). Accordingly, only 70% of income from equity funds whether arising from distributions or redemptions is subject to tax, while the remaining 30% is exempt to reflect corporate taxes already paid at the fund level. These investor-level reliefs were designed to offset the new fund-level taxation and are therefore directly linked to the 2018 reform.

However, foreign investors are excluded from these exemptions and remain taxable on 85% of the gross dividend, resulting in a higher effective tax burden compared to German investors. This distinction may amount to discriminatory treatment under EU law, potentially infringing the principles of the free movement of capital and the freedom of establishment enshrined in the Treaty on the Functioning of the European Union.

Under the current regime, both German and foreign investment funds are subject to a 15% WHT on German-source dividends at the fund level (provided a German status certificate is in place). The distinction arises only at the investor level, where Germany grants partial tax exemptions (“Teilfreistellung”) to domestic investors.

Under the generic taxation principle for private investors in Germany, investment income such as dividends received from funds or gains realized upon the sale or redemption of fund units is generally subject to the flat investment income tax (Abgeltungsteuer) at a rate of 26.375% (including the 5.5% solidarity surcharge). This tax is typically withheld at source by the custodian bank. For equity, mixed, and real estate funds, only the taxable portion of the income after applying any partial exemption (Teilfreistellung) under §20 GInvTA is subject to this rate.

The exemptions vary depending on fund and investor type:

• Equity funds (>50% equities):
  • Private investors (non-business assets): 30% partial exemption under §20 GInvTA.
  • Private investors (business assets): 60% partial exemption.
  • Corporate investors: 80% partial exemption.
• Mixed funds (≥25% equities):
  • Exemption generally corresponds to half of the equity fund rate, e.g., ~15% for private non-business investors.
  • Corporate investors: ~40% exemption.
• Real estate funds (>50% real estate / real estate companies):
  • Private investors: 60% partial exemption (for German real estate focus).
  • Corporate investors: 60–80% partial exemption, depending on the fund’s real estate allocation.

Example:

• German dividends are first subject to 15% fund-level WHT, resulting in an 85% net distribution.
• A private German investor in an equity fund can apply a 30% partial exemption on this 85%, yielding an effective tax base of 59.5% of the gross dividend.
• A German corporate investor in the same fund may apply an 80% exemption, resulting in an effective tax base of 17% of the gross dividend.
• In contrast, foreign investors (private or institutional) receive the same 85% distribution but are taxed on the full amount, as no equivalent exemption is generally available in their country of residence.

As a result, German investors benefit from a lower effective tax base under German tax rules, while foreign investors are not entitled to these partial exemptions and are taxed on the full distribution amount.

This outcome creates a clear distinction between domestic and foreign investors and mirrors the structure considered discriminatory by the CJEU in the German Car Toll case (C-591/17): while both domestic and foreign taxpayers bear the same nominal charge, only domestic taxpayers receive a compensating relief, leaving foreign investors with a higher effective tax burden.

Following this reasoning, KPMG has filed a test case before the Cologne Tax Court, challenging the investor-level exemption mechanism under the GInvTA as indirectly discriminatory under EU law. As mentioned above, the Court’s decision is expected in early 2026.

While the GInvTA harmonized fund-level taxation, investor-level exemptions continue to create unequal treatment, disadvantaging foreign investors and breaching EU law principles on equal treatment and free movement of capital. By filing WHT reclaims and appeals, and leveraging KPMG’s expertise, foreign funds can protect their rights and potentially reduce effective WHT to 0%, ensuring fair treatment comparable to German investors.

1. File WHT Reclaims within the recommended 2 - year time limitation period which starts after the fund’s year-end). Submit claims for withholding tax paid on dividends based on the proportion attributable to foreign investors, potentially reducing the effective WHT to 0%.
2. Appeal Rejections: Challenge any refusals by German tax authorities within the one-month legal deadline.

KPMG will closely monitor the outcome of the Cologne Tax Court case and provide timely updates including explanations of the implications and next steps.