Due to the COVID-19 pandemic, the passive violation of asset composition limits in March and April 2020 will be without consequences for investment funds.

Federal and state level relief

On 9 April 2020, the Federal Ministry of Finance (B.M.F.) (after coordination with tax authorities of the federal states) published a decree regarding tax relief measures for investment funds reflecting the economic consequences of the COVID-19 pandemic¹.

Passive violation of asset composition requirements

A substantial violation of the requirements for the composition of assets leads to the loss of the status as an equity fund, a mixed fund or real estate fund in accordance with Sec. 2(6) s. 4, Sec. 2(7) s. 4 or Sec. 2 (9) s. 7 of the InvStG. This status is particularly relevant for the taxation of investors, as it determines the rate of the partial tax-exemption applied in accordance with Sec. 20 InvStG.

In the event of a passive violation of the asset composition requirements, a substantial violation of the asset composition requirements might be assumed if the investment fund does not take possible and reasonable measures immediately after becoming aware of the violation in order to restore the required level of capital participation or real estate investments².

Due to the COVID-19 pandemic, the B.M.F. communicated in its decree of 9 April 2020 that, in principle, a passive violation of the asset composition requirements will not be considered a substantial violation for the period between 1 March and 30 April 2020. In this regard, the B.M.F. expressly refers to a regulation for equity and mixed funds. However, the same treatment should apply to real estate funds, since the regulations for equity or mixed funds apply to real estate funds in this respect³.

20-business day limit

If an equity fund, a mixed fund, or a real estate fund falls short of the asset composition requirements stipulated in Sec. 2(6), 2(7) or 2(9) InvStG for a total of up to 20 individual or consecutive business days within a financial year (the “20-business day limit” ) this will not be considered a substantial violation of the asset composition requirements⁴.

As, however, a period of 20 business days may prove to be too short in the current COVID-19 pandemic, a passive violation of the asset composition requirements occurring between 1 March and 30 April 2020, will not be counted towards the 20-business day limit.

Substantial violation of the investment regulations of a special investment fund

The status as special investment fund under Sec. 26 InvStG depends, among other things, on the fund not substantially violating the investment requirements listed in Sec. 26 InvStG in its actual investment practice.

If special investment funds do not comply with the statutory limits in March and April 2020, due to a passive violation of the asset composition requirements, this will not be considered, in principle, a substantial violation of the investment rules.

Consequences for the procedural law

The B.M.F. did not comment on the procedural consequences of a possible retroactive application of the B.M.F. decree of 9 April 2020.

If, in accordance with B.M.F. decree of 9 April 2020, there is no substantial violation of the asset composition requirements, we do not believe that the investment fund should be required to notify the competent tax authority as Sec. 153(2) Fiscal Code (AO) demands⁵.

In our opinion, it should not be necessary for investors to be notified of a change in the partial tax-exemption rate⁶. Similarly, it should not be necessary to notify other parties such as those obliged to pay taxes or various financial information service providers (e.g., WM-Datenservice) ⁷ of a correction of previous information on the applicable partial tax-exemption rate since no “substantial violation” has occurred.

If such changes or corrections have already been implemented for the period beginning 1 March 2020, we believe that it should be possible to reverse this.

If a party obliged to pay taxes has assumed a substantial violation because of the notification and has already taken the loss of status of an equity fund, mixed fund, or real estate fund into account for the deduction of withholding taxes, we believe that this⁸ should be reversible, too.

Conclusion

The measures of the B.M.F. decree of 9 April 2020, are a helpful measure for crisis management. However, due to its retroactive application to 1 March 2020, it would have been helpful for the B.M.F. to include information on reversing actions already taken as a consequence of an assumed passive violation of the asset composition requirements.

The fact that the measures are limited in time to 30 April 2020 has caused some concerns. It remains to be seen whether the B.M.F. will grant an extension.

¹ B.M.F. decree of 9 April 2020, Investment tax measures reflecting the economic consequences of the COVID-19 pandemic, IV C 1 -S 1910/19/10079 :002.

² B.M.F. decree dated 21 May 2019, regarding the Investment Tax Act; questions of application of the Investment Tax Act in the version applicable from 1 January 2018 (InvStG), BStBl 2019 I p. 527 (“InvStG 2018 B.M.F. decree”), no. 2.18.

³ InvStG 2018 B.M.F. decree, no. 2.41.

⁴ InvStG 2018 B.M.F. decree, no. 2.19.

⁵ InvStG 2018 B.M.F. decree, no. 2.22 makes a substantial violation of the requirements regarding the composition of assets a precondition in this respect.

⁶ InvStG 2018 B.M.F. decree, no. 2.22.

⁷ InvStG 2018 B.M.F. decree, no. 2.22.

⁸ Cf. generally InvStG 2018 B.M.F. decree, no. 2.23.