Changes for capital investors

In addition to non-application laws on taxpayer-friendly rulings, the main changes for capital investors in 2020 are detailed changes for certain types of investments.

There will also be changes in tax law again for capital investors in 2020. In particular, the unofficial Annual Tax Act 2019 contains changes for investment funds and other capital investments. However, these are not substantial new regulations in tax law, but essentially clarifications. What is primarily new is that interest income is also to be subject to the capital gains tax deduction that was brokered via an internet platform.

Another change, however, has much more serious consequences for capital investors, because in the Annual Tax Act 2019, two further amendments to the law were planned for 2020, with which the Federal Ministry of Finance wanted to remove the legal basis for taxpayer-friendly rulings of the Federal Fiscal Court. However, these were removed from the final version by the Bundestag and instead inserted in a different law in an amended form. The full effect of the changes will not be felt until 2021, but part of the new loss offset restriction will already apply from this year. You can read all the details about this change, the loud criticism of it and planned constitutional complaints in one of the next issues.

• Total loss: In recent years, the German Federal Fiscal Court has recognized various forms of total loss of a capital investment as a tax-deductible loss. For losses realized from 2020 onwards from the default of a capital claim, the derecognition of a share or the sale of worthless assets, a loss offset restriction will therefore be introduced. Such losses can only be offset against income from capital assets and up to a maximum amount of EUR 10,000 per year. Losses that have not been offset can be carried forward to the following year.

• Crowdlending: The final withholding tax on interest is now also levied if the interest originates from a receivable that was acquired via an Internet platform. The reason for this change is crowdlending, in which many small investors act as lenders instead of a bank. If the investment is brokered via an Internet platform that also handles the payment of the investment income, no capital gains tax was withheld under the previously applicable regulations, even though the platform operator had the necessary information. In the past, taxation of the investment income therefore depended solely on the investor declaring it in his income tax return. Now, the withholding of capital gains tax in these cases is to be carried out by the domestic operator or by the domestic branch of the foreign operator of such a crowdlending platform.

• Mutual Funds: Various amendments to the Investment Tax Act are primarily clarifications of the status of an investment fund. This both removes legal uncertainties and eliminates tax structuring opportunities due to unclear wording. In addition, the timing of the inflow of distribution-equivalent income of a special investment fund is shifted from the end of the fiscal year to the time of sale. This is intended to prevent the fund from having to subsequently claim the capital gains tax from the investor if all units are sold during the fiscal year.

• Fund Establishment Costs: Fund establishment costs to be paid by the investor when purchasing a fund unit are part of the acquisition costs of the assets acquired by the fund and are thus not immediately deductible in full as operating expenses or income-related expenses. A fund investor is always deemed to be an acquirer if he or she does not have a significant influence on the contractual arrangements specified by the fund initiator. A new paragraph in the German Income Tax Act retroactively enshrines this long-standing legal interpretation in law after the German Federal Fiscal Court changed its case law on this issue.

• Employees: Employees who have received investment income without a tax deduction (final withholding tax) must now submit a tax return. There is no de minimis limit for this.

• Retirement contracts: Providers of retirement pension contracts must inform the customer in writing each year about the use of the contributions paid in and the amount of capital accumulated, as well as about the form and amount of the planned payouts before the start of the payout phase. From 2020, these notifications may also be provided electronically with the customer's consent.