Vast tax reporting changes and pre-payment of estimated annual gains taxes impacting every Expat and German residing in Germany and having fund investments were recently enacted by the German government as a reaction to court decisions of the European Union.

The new rules will impact markedly upon the profitability of investments and investors throughout the European Market area as well. These are retroactive to January 1st, 2018.

These regulations are relevant for all investors because:

Everyone resident in Germany must henceforth declare global investment assets for tax purposes. The new twist is – the payment of estimated gains taxes — even if the product has not been sold.

Should the investment eventually be sold, the actual sale price tax will then result in a tax credit should a loss have been incurred; conversely, a greater tax will be imposed based on the increased profitability above and beyond the estimated pre-sale payments.

(This also applies to US nationals who, because of their US citizenship, have to report their investment income in the United States as well as in Germany. However, double taxation can be avoided by calculating the German taxation against one’s US tax liability.)

If you are filing your own taxes, this new situation with its myriad hypothetical situations can become an accounting nightmare especially given its esoteric probabilities, said regulations being couched in language which is difficult enough for experts but impenetrable to laymen. Worse, even more new rules are anticipated further compounding the situation.

However, if you are holding all your investment assets with a custodian bank in Germany and your bank is undertaking the necessary administration, you need not read on — because your custodian bank will calculate all necessary tax information under the new regulations and will prepare a certificate for you to send to your tax office.

If, on the other hand, your financial investments are held with banks outside Germany, you and your tax adviser will have to prepare the necessary documentation for tax purposes in Germany.

What does one have to do to be in compliance with the new regulation?

In addition to disbursements, the capital gains on each fund will need to be calculated from the beginning of 2018. These are now taxable as long as these funds have not been sold before the end of the year.

Therefore the following steps will have to be undertaken for EACH FUND.

  1. Classification into one of three fund categories. (Equity fund, Mixed fund or ‘Special’ fund)
  2. Calculation of the capital gain between January 1st and December 31st after the deduction of distributions.
  3. Calculation of the following year’s taxable gain.

All future profit calculations will be set against the income generated by the proceeds of an actual sale of the fund. If an additional investment in a fund is undertaken, or if balances are only partly sold, the documentation is even more complicated, especially as a report covering the financial returns of an investment in each fund over the past several years will also be required.

Conservatively estimated, one can expect an annual time expenditure per fund for this additional documentation of at least half an hour and more. This will result in considerable additional costs for advice from your tax adviser. That in turn will have a negative impact on the returns of an investment portfolio.

Note that no prepayment taxation will need to be calculated for funds sold in 2018, because the actual profit and loss on these investments will already be apparent. Investors should however decide now how their fund investments should be structured for the future.

These new tax regulations should be discussed with your tax adviser at your earliest opportunity. Based these increasingly problematic new regulations, investors may soon discover that their “significant other” is not a spouse, sweetheart or lover but their tax advisor!

This Advisory was contributed by Susanna Regenbogen – tax adviser and specialist consultant for international tax law. This Advisory is merely a very much-shortened summary of the new necessary reporting process. For more complete information you can contact us: