Extension of Exit Taxation to Units in Investment Funds by the Annual Tax Act 2024

Intention of the Statutory Reform

Following a proposal from the Bundesrat, the JStG 2024 was amended to include exit taxation on units in (special) investment funds owned by private investors with unlimited tax liability in Section 19 (3) and Section 49 (5) InvStG. Previously, natural persons who held investments in investment funds (especially in the legal form of common fund (Sondervermögen) and moved abroad were able to avoid exit taxation on these assets, as investments common fund (Sondervermögen) were not covered by Section 6 AStG in conjunction with Section 17 German Income Tax Act (Einkommensteuergesetz - EStG. The provisions of Section 4 (1) sentence 3 et seq. EStG and Section 12 German Corporate Tax Act (Körperschaftsteuergesetz – KStG) apply to shares held as business assets: the tax exemption regulations. German legislative bodies have therefore complemented the InvStG by adding independent rules on exit taxation.

Statutory Prerequisites and Consequences

The new regulations distinguish between two taxation cases: for investment funds (Chapter 2 Funds) the new rules are found in Section 19 (3) InvStG, and for special investment funds (Chapter 3 Funds) in Section 49 (5) InvStG. The following prerequisites are required for exit taxation: (1) termination of unlimited tax liability by relinquishing residence or habitual abode in Germany, (2) the transfer of units free of charge to persons who are not subject to unlimited tax liability, and (3) cases in which the domestic right of taxation on gains from the sale of the units is otherwise excluded or restricted.

A threshold has been established below which the new rules do not apply to Chapter 2 funds: a stake of less than 1% in the investment fund or acquisition costs of less than EUR 500,000. These thresholds are designed to ensure that only significant holdings are included within the scope of the new rule. It is worth noting that the acquisition costs, and not the fair market value of the fund units, are decisive. In contrast, there are no thresholds for special investment funds; instead, there is a statutory presumption that the relevant shareholding threshold is met.

In consequence, the criteria establishing exit taxation are legally equivalent to the sale of (special) investment units at fair market value. Accordingly, a sale is deemed to have taken place and a notional capital gain subject to income tax is assumed. Additionally, repatriation rules apply, which means that the resulting tax liability ceases to exist if the taxpayer returns to Germany within a specified period of time. The option of deferring the tax payment is expected to reduce the financial burden arising from the fictitious sale, which as a matter of fact occurs without a corresponding inflow of liquidity (dry income).

Open Questions and Criticism

The introduction of exit taxation on investment funds has raised a number of questions and drawn not insignificant criticism. On the one hand, there are concerns regarding conformity with European Union law. Secondly, setting the threshold at acquisition costs greater than EUR 500,000 must be questioned: There are uncertainties regarding the offsetting of profits and the treatment of different share classes. It remains to be seen whether these concerns can be adequately addressed – especially with regards to conformity with EU law – and therefore whether the new rules can serve as a model for further exit taxation. Further, the new rules will not apply to most holdings in private equity and venture capital funds, since these are usually organized as partnerships that are not subject to InvStG.

Published: February 2025

Your Contact: