16 October 2014 Global Tax Alert News from the EU Competency Group EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. • Copy into your web browser: http://www.ey.com/GL/en/ Services/Tax/InternationalTax/Tax-alert-library#date CJEU declares German flat tax on ”non-transparent“ investment funds as incompatible with Union Law On 9 October 2014, the Court of Justice of the European Union (CJEU) rendered its decision in a German case, van Caster (C-326/12), addressing the German flat tax on “non-transparent” investment funds. Investment funds are deemed to be “nontransparent” if they do not comply with the German publication and notification rules of the Investment Tax Act (ITA). In such a case, a flat tax amounting to at least 6% of the last fixed redemption price of the investment units is levied. In the instant case, two Belgian nationals resident in Germany held units in nonGerman investment funds held on deposit with a Belgian Bank. The investment funds did not comply with the notification and publication requirements of Section 5 of the ITA, which applies to both domestic and foreign investment funds. Under the German ITA, a transparent taxation of the funds required among others that an investment fund informs its investors in detail about the proceeds of the funds and its composition and publishes this information in the electronic bulletin of official announcements within four month after the close of the business year where the proceeds are or are deemed to be received, accompanied by a certificate issued by a person authorized to provide professional assistance in tax matters or of an official recognized audit agency. Foreign investment funds needed to comply with additional rules. Since the investment funds did not publish any information in the electronic bulletin, the tax authorities charged the 6% which is also known in practice as a “punitive tax.” In the proceedings before the CJEU, Germany defended its position by arguing that the publication and notification requirements are applicable to both domestic and foreign investment funds, hence, no discrimination existed. Further, these rules were, in the view of the German Tax Authorities, justified as they were necessary for ensuring an effective tax collection and a uniform taxation of all (German) taxpayers. The Court did not follow Germany’s line of argument. Since most of the non-German investment funds fall under the non-transparent taxation of Section 6 of the ITA, the Court saw a “covert” discrimination. Further, in the CJEU’s view, the rule went too far in what was necessary to attain the objectives brought forward by Germany, as in principle the taxpayer must have the chance to present documentation to the tax authorities according to which the tax authorities are able to establish the right tax. An excessive administrative burden as a result of this possibility cannot be claimed by the German tax authorities. The Court requested from the tax authorities to determine the content, the form and the degree of detail which the information submitted by the taxpayer must satisfy. Impact The decision should give investors in foreign funds which are not compliant with the German notification and publication rules the possibility provide the tax authorities in each individual case with documentation on nontransparent funds with respect to the taxable income derived through the investment units. However, it remains to be seen how strictly the tax authorities will apply the documentation requirements. For fiscal years prior to 2004, the German Federal tax court has already held that the flat tax being in place during these years contradicted the Free Movement of Capital Principle, since that rule explicitly covered non-German investment funds only. The Court referred the question to the CJEU whether also in third country situations Union Law protects investors’ non-EU-investment funds.1 Endnotes 1 2 German Federal Tax Court of 6 August 2013, VIII R 39/12; CJEU case reference: C-560/13, Wagner-Raith. Global Tax Alert EU Competency Group For additional information with respect to this Alert, please contact the following: Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich • Dr. Klaus von Brocke, EU Tax Services +49 89 14331 12287 • Stefan Mueller, EU Tax Services +49 89 14331 16635 [email protected] [email protected] Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Frankfurt • Tim Hackemann, ITS/EU Law +49 6196 996 21718 [email protected] Global Tax Alert EU Competency Group 3 EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. EU Competency © 2014 EYGM Limited. All Rights Reserved. EYG No. CM4801 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com