Upcoming GITA changes with impact on the asset ratio calculation

The ”Law to prevent VAT losses on trade in goods on the internet and to amend other tax rules and regulations” (formerly called "Annual Tax Law 2018") has been published in the German official gazette (“Bundesgesetzblatt”) on December 14, 2018. Changes introduced by this law include, among others, amendments to the German Investment Tax Act, which will impact the calculation of the asset ratios:

• The minimum equity asset ratio for equity funds is readjusted to 50 percent of the total assets (instead of 51 percent)

• The minimum real estate asset ratio for real estate funds is readjusted to 50 percent of the total assets

• For fund-of-funds the investment objectives need to stipulate that the investment in collective investment schemes leads to a continuous compliance with the relevant equity asset ratio by using the effective equity asset ratio of the target funds as published per each valuation date

Note: These new provisions regarding the asset ratios will not trigger any further modification of the fund’s investment conditions in case the investment fund has been launched before 1 January 2019 and the investment conditions have already been amended in order to reflect the (former) requirements of sec 2 paras 6-9 GITA applicable as from 1 January 2018. This is stated by a new transition rule (sec 56 para 1a GITA).

• With regards to fund-of-funds, some provisions currently to be found in the draft letter will in the future be part of the law:
  • For a fund-of-fund’s asset ratio calculation, minimum equity asset ratios higher than 50percent/25 percent can be used if they are defined in the respective target fund’s investment conditions
  • In case daily asset ratios higher than minimum ratios are published by the underlying target funds they can be used, but only if the target funds have at least a weekly valuation (otherwise, only minimum ratio can be used, with exception for real estate funds)
• The provisions regarding severe and minor breaches that are currently part of the draft letter will also be transferred to the law.
  
• New definition of “total assets” (Aktivvermögen) in sec 2 para 9a GITA:
  
  • The guidance to the draft law advises that the total assets represent all items on the asset side of the balance sheet at market value, including equity, bonds, derivatives etc.
  • Any item that would be considered as liability needs to be excluded
    
• A modified simplification rule will replace the current simplification rule for the calculation of the asset ratio(s). The modified simplification rule still allows to use the net asset value as basis for the determination of the asset ratio(s) under certain conditions. Unfortunately, the law counteracts the simplification rule directly: it introduces the obligation of a pro-rata deduction of any borrowings when determining the equity assets, respectively the real estate assets. This will increase the complexity of the calculation of the asset ratio(s).
  
  The guidance to the draft law explains that by introducing the new provision (modified simplification rule) the German tax authorities want to prevent even the slightest possibility of using the simplification rule as a means of what they would see as tax structuring. Therefore, they have modified the simplification rule in a way that it leads to the same results as the general rule.
   

Fund A:

Total assets: 460+540= 1000

A/ Equity ratio calculated with use of total assets (general rule):

460/1000 = 46 percent > fund would not qualify as equity fund, but only as mixed fund

B/ Equity ratio calculated with use of NAV (current simplification rule, no more to be used!):             

460/900 = 51,1 percent > fund would qualify as equity fund

C/ Equity ratio calculated with use of NAV (new modified simplification rule):

Part of borrowings that must to be attributed to the equity assets: 100*460/1000 = 46

Equity assets after deduction of borrowings: 460-46= 414

Equity ratio: 414/900 = 46 percent > the fund would not qualify as equity fund, but only as mixed fund

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