The tax law proposed by Germany’s Finance Ministry (BMF) risks throwing the baby out with the bath water, according to some within the country’s pension and investment industry. 

The BMF, responding to concerns that the current tax regime is not fully in line with European tax regulations, caused concern with many in the industry after it published a proposal on an extensive reform package.

Under the proposed regulation, a new tax is to be introduced at the investment fund level for mutual funds.

At the moment, investments via funds in Germany are taxed similarly to direct investments.

In turn, some of the profits from the sale of fund shares are to be tax exempt.

Many insurers, investment managers and employers, however, are sceptical that this will offset the level of new taxes.

They are particularly worried about investments by occupational pension providers via mutual funds due to concerns about double taxation.

A Pensionsfonds investing in a mutual fund would have to pay tax at the fund level for domestic dividends and real estate profits, which, in turn, “would cut into returns at the expense of the members”, according to a number of industry groups, including the insurance federation, the trade and services association, the craftsmen association and the banking federation, among others. 

In a joint statement, the pension fund association (aba), the association for Versorgungswerke (ABV) and the association of church and municipal retirement providers (AKA), also warn of an “inappropriate double taxation” of domestic dividends and real estate profits, as pensioners have to pay taxes on those in the payout phase already.

“Not only does such a double taxation lead to an unjustified cut in returns in occupational pensions,” they added, “but it also has to be questioned from a constitutional point of view.”

Taxation of real estate profits is also a major concern.

The associations argue that some of the changes proposed by the BMF create uncertainty over whether further taxation on real estate profits will be introduced for institutional investors, even at the level of Spezialfonds.

They also claim the new taxation at a fund level – in combination with taxation in the payout phase – would make investment funds less attractive than direct investments.