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BVI warns CGT may hurt German competitiveness

GERMANY - Fund industry association BVI has warned the competitiveness of Germany as a financial centre may suffer unless the government amends a planned capital gains tax (CGT) on funds.

The German parliament will give final approval on July 6 to a new capital gains tax of 25% pertaining to funds and securities, paving the way for the tax to take effect from January 2009.

IPE reported earlier this month the BVI had so far failed in a bid to persuade the government to provide tax breaks on funds employed for retirement.

More specifically, the BVI wants the capital gains tax to be waived if a German saver holds on to a fund for at least 12 years or if the saver takes withdrawals from the fund after 60.

"What we're saying is that only by improving the capital gains tax can we effect a reduction in bureaucracy, a higher acceptance of the tax itself and a strengthening of Germany's financial centre," said BVI president Wolfgang Mansfeld.

To buttress its case, the BVI has now released a list of eight European countries where there is either no capital gains tax on funds or where relief from the tax is provided. Those in the former category include Switzerland, Belgium and the Netherlands.

Those in the latter category are Austria, Luxembourg and France, although the capital gains tax in these countries expires after a certain time period.

For Luxembourg this period is six months, while it is 12 months in Austria and eight years in France. However, savers in France do not have to pay capital CGT on fund earnings of up to €20,000 per annum. In the UK, investment gains equalling €13,000 per annum are also exempt from CGT.

Mansfeld said Germany's looming capital gains tax had even prompted several BVI members to launch funds from Luxembourg, which permits shareholders to almost completely evade the tax. Known as ‘special funds', the products are primarily targeted to high net worth individuals.

Germany has not been the preferred place for asset managers to domicile funds for that market in past years. According to the BVI, only 16% of the 293 funds launched for the Germany were domiciled domestically as the remainder are domiciled in other European countries such as Luxembourg and Ireland.

That said, the domestic domiciling ratio improved in 2006 to 30% of all funds for Germany. And for the first four months of 2007, the ratio was above 50%, according to the BVI.

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