COVID-19 and the German Investment Tax Act

Click here to read this article in German.

Against the background of the economic consequences of the COVID-19 pandemic, the Federal Ministry of Finance (Bundesministerium der Finanzen – BMF), in coordination with the highest revenue authorities of the German Länder, clarified in a decree dated 9 April 2020 the original regulations in the BMF decree regarding the German Investment Tax Act (InvTA), in particular with regard to the breach of the investment restrictions (BStBl. I 2019, S. 527, para 2.18 ff.).

Principles of the BMF decree regarding the Investment Tax Act

Originally, the BMF stipulated in its decree regarding the InvTA that a material breach of the asset composition requirements would lead to the loss of the status as an equity or mixed fund. Whether a breach is material (wesentlich) depends on the overall circumstances of the individual case. When assessing materiality, the following should be considered, in particular:

• the degree of fault of the manager in relation to the breach;
• duration of the breach;
• the value of the breach in relation to the total value of the Fund's assets; and
• the extent of the manager's efforts aimed at remedying the breach.

In particular, no material breach shall be deemed to have occurred in the case of a so-called passive breach if the investment fund, immediately after becoming aware of the breach, takes possible and reasonable measures to restore the equity participation ratio required of it. Possible measures are to be assessed depending on the respective assets and their tradability. A passive breach of the threshold may occur in particular due to changes in the value of the assets held, an unintentional or involuntary incorrect classification of an asset as an equity participation, or due to the normal market duration of the settlement of the acquisition of ownership of securities and their payment.

In order to simplify the procedure, no material breach is generally to be assumed if an equity or mixed fund falls below the asset limits of sec. 2 para 6 or 7 InvTA on a total of up to 20 individual or consecutive business days (banking day) in a financial year (20-business day limit).

The 20-business day limit must be considered separately for each financial year. This means that a continuous breach of the limit in the last 10 business days of a fiscal year and in the first 11 business days of the following fiscal year does not constitute a breach of the 20-business day limit. In the case of an abbreviated fiscal year, the 20-business day limit is to be considered together with the next fiscal year or with subsequent abbreviated fiscal years, so that the relevant period is at least one year.

Clarification of the BMF by decree dated 9 April 2020

In the meantime, the BMF has confirmed in its decree dated 9. April 2020 that so-called passive breaches, which occurred or will occur between 1 March 2020 and 30 April 2020 do not qualify as a substantial breach of the investment restrictions applicable in relation equity funds or mixed funds in accordance with the InvTA and, therefore, will not lead to the loss of the status as an equity fund or mixed fund.

Further, as the official tax decree regarding the InvTA states that for simplification purposes a non-compliance with the applicable investment restriction generally does not qualify as a substantial breach, if such non-compliance does not exist on more than 20 business days in a business year, the BMF has further confirmed that such breaches between 1 March 2020 and 30 April 2020 will also not be taken into account for the purposes of the calculation of such 20-business-day-threshold.

See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.