EUROPE - Germany is the prime target of action against discriminatory rates of tax on foreign investment funds in Europe, while most EU members continue to block a real single market for funds through differential tax levies.
The German government faces sanctions from the European Commission over the levels of tax on imposed on foreign fund managers.
FEFSI, the European federation which represents around 900 European fund managers, has been lobbying the European Commission, and the German government against higher rates of tax on dividends levied on foreign fund managers compared with their domestic German counterparts. As a result, the Commission launched an infringement procedure in December 2002.
But the campaign has gained momentum following German government plans to increase the level of discrimination with its budget proposals to impose capital gains taxes at more than twice the domestic level on foreign fund managers.
Under the original proposals for German funds, the investor would be taxed at around 40% on half of gains made by the fund annually and again at 15% on disposal of units in the fund. For foreign funds the investor would be taxed at around 40% on all gains made by the fund annually and again at 15% on disposal.
Under pressure from its own fund management industry the German government has relented and will not now impose double taxation on its own domestic funds. But that, said Nathan Hall, tax adviser at the Investment Management Association in the UK, merely serves to increase the discrimination against foreign funds.
The Budget plans face passage though the upper house of the German parliament later this month.
Germany faces lobbying from fund managers worldwide, from FEFSI, the Investment Management Association in the UK, and the IMI in the US.
In January, Alan Ainsworth, deputy chairman of Threadneedle Investments and chairman of the IMA’s European Strategy Group representing 21 UK fund managers, presented the IMA case to the finance committee of the German parliament.
He argued that discrimination would be so severe that foreign fund managers would be forced to withdraw from the German market altogether or set up an operation in Germany. That, he claimed, would impact on German investors and the German economy in that costs for investors would go up, investment choices would be limited and employment would be adversely affected.
IMA is now waiting to get a reaction from the German government. Hall said that if it was not willing to move, further action would have to be considered.
“We would have to crank up the pressure and consider legal action, which nobody wants,” he said.
Meanwhile PricewaterhouseCoopers has followed up on its 2001 report, produced in conjunction with FEFSI, identifying those members states which discriminate through tax against foreign funds. Only Finland, Luxembourg and Spain earned a clean bill of health. Greece is the sole country which has acted to eliminate unfair taxation completely by extending the exemption on capital gains tax on redemption of units to UCITS investors.
The follow-up report singles out action by four states:
Austria: its Constitutional Supreme Court considers the country’s taxation of foreign funds as unconstitutional and the government has been advised to reform its tax laws but it is still unclear how it will proceed.
France: some reform has taken place but the worst discrimination remains: investors must invest in a French based fund to obtain personal tax benefits.
Ireland: there are indications that Ireland will address the 2% health contribution levy on distribution from offshore funds that does not apply t
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