The European Commission and German parliamentarians hold the future of market harmonisation across t...
The European Commission and German parliamentarians hold the future of market harmonisation across the EU in their hands this week after news that the German government is proposing a new tax law starting in February that would discriminate between domestic and non-domestic investment funds.
The Steuervergünstigungsabbaugesetz, or "law aiming to reduce tax benefits and exemptions" will sharply increase the government's capital gains tax revenue and introduce different rates for domestic and non-domestic funds.
Opponents to the new law say that these different rates clearly contravene existing EU single market principles and go against the grain of continuing efforts to break down barriers to investing across borders of EU member states.
What makes the situation worse is that it comes on top of other tax law announced two years ago by the German government, which introduced a major shift in policy away from a system of tax credits towards a system of "half-taxation" on investment income.
Despite stiff domestic opposition from the German equivalent of the Investment Management Association, the BVI, the government was able to get away with that change, which has now encouraged this follow-up proposal.
Robert Priester, senior legal adviser for FEFSI, the European federation of investment funds and companies (Fédéeration Eruopéenne des Fonds et Sociétés d'Investissement), says the shift two years ago has already introduced the principle of discrimination
However, as the new changes will abolish the "speculation period" of one year beyond which capital gains are currently tax free under the German system, FEFSI sees a far greater amount of opposition being created.
"There are now three levels of discrimination," Priester says.
"The new law will treat all income as speculative gains regardless of the time the investments are held. Individual investors will be hit by capital gains taxes even through the funds have already paid capital gains tax. And foreign funds will not be able to apply the "half-taxation" rules, which enables German based funds to apply CGT to just 50% of the dividends and capital gains made. "
In the UK the opposition is being led by the Investment Management Association along with 11 companies active in the German market: Fidelity, Franklin Templeton, Garmore, Goldman Sachs, Henderson, JP Morgan, Jupiter, M&G, Merrill Lynch, Schroders and Threadneedle.
The fight is also being taken to the German government by the BVI, and similar associations in France, Ireland, Luxembourg, the Netherlands and Switzerland.
BVI spokesman Andreas Fink says there is strong local opposition to the new law despite the government's confidence in being able to pass it through a vote of parliament.
"We will have a single market in the EU, so it should not be possible for this law to go through."
"The main point for us is the double tax rule: we don't understand why the investor has to be taxed twice. There was no CGT before because of the half-tax rule. Other countries have CGT, but their income tax rates are far lower than in Germany. "
"As we understand it the measures are being introduced because of the budget difficulties being faced by the government, which is looking to get more money. And that means it is not a very popular measure. It also means there is no level playing field compared to other types of investments."
"We are pretty sure we won't get this tax because it is not fair to discriminate against foreign companies and investors."
The outcome now rests with German MPs, which must still vote through the proposed changes to the existing tax code sometime early in the New Year if the measures are to go into effect by the February deadline already flagged up.
EC Commissioner Fritz Bolkestein is the other hurdle, as he is in charge of EU tax issues and could require the German government to remove the discriminatory measures in the new law - although it is unlikely he could force a climbdown on domestic CGT rates.
FEFSI has written to Bolkestein's office complaining of a "flagrant violation of EU rules".
"It is his concern first and foremost," says Robert Priester.
Taxation is high on the agenda of EU finance ministers at present with the horse-trading going on over how to get Switzerland to rescind its banking secrecy laws and the issue of offshore financial services in general.
It is not clear whether this might get tied into the discriminatory practices being proposed in Germany if the protests are taken up by other EU governments.
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