Capital gains from portfolio investments

While to date capital gains were in general ultimately 95% tax-free for shareholders subject to corporation tax without any minimum shareholding being taken into consideration, a tax liability for capital gains from “portfolio investments” is now looming in Section 8b (4) of the German Corporation Tax Act (Körperschaftssteuergesetz – KStG). This is at least provided for by a recently published draft bill on the reform of investment taxation which contains this legislative amendment. The legislator is, amongst other things, therefore complying with a demand of the Bundesrat (upper house of the German parliament), which has in the recent past repeatedly called for capital gains to be taxed.

Pursuant to Section 8b (4) KStG, so far only dividends from portfolio investments were fully taxable for corporations, while capital gains were otherwise ultimately 95% tax-free.

As to date, it remains the case that a portfolio investments is deemed to exist if at the beginning of a calendar year an investment directly amounted to less than 10 per cent of the nominal or share capital.

The draft provides for additional changes in the event that investments are acquired during the year. These are, however, only to apply for dividends and not for capital gains from portfolio investments. The draft also contains loss offset restrictions for capital losses from portfolio investments.

The draft bill does, however, also bring some good news: on the one hand, the tax liability is not to apply for capital gains from portfolio investments for shareholders who are not subject to income tax. The part-income regime (40% tax exemption) or the flat-rate withholding tax regime for capital gains from portfolio investments will therefore continue to apply for income tax payers.

On the other hand, the tax liability is first to apply for capital gains from portfolio investments which are achieved by a corporation after 31 December 2017. The feared retroactive amendment in the current 2015 tax assessment period will therefore not occur.

Changes may, however, still be made to the planned legislative amendments because this draft bill is not the official draft bill of the Federal Ministry of Finance, but only a “discussion draft” on which professional associations can comment.

Further developments remain to be seen.