New exit taxation for shares in (special) investment funds

1. Background

For exit cases from 2025 onwards, after the Bundesrat has approved the so-called Annual Tax Act 2024 on November 22, 2024, exit taxation on shares in investment funds will be extended by corresponding amendments to the Investment Tax Act (InvStG). According to the explanatory memorandum to the law, this is intended to close taxation gaps.

Significant holdings in corporations held as private assets with a holding of 1% or more are already subject to the German exit taxation under certain circumstances, according to the current version of Section 6 of the German Foreign Tax Act (Außensteuergesetz, AStG). Such exit taxation is triggered if a person with unlimited tax liability in Germany for at least 7 of the previous 12 years fulfills one of the following exit criteria:

• The termination of the unlimited tax liability in Germany as a result of the abandonment of the domicile or the usual place of residence in Germany or
• the transfer of the shares in a corporation by way of inheritance or gift to persons who are not subject, without limitation, to taxation in Germany, or
• the exclusion or restriction of German right of taxation under a double taxation agreement with respect to the gain from the disposal of the shares.
  

The legal consequence of the exit taxation under Section 6 AStG is a deemed disposal of the shares in the corporation at fair market value. The gain from the deemed disposal is subject to taxation, i.e. an unrealized gain triggers taxation that generally impacts liquidity. As a rule, this represents a considerable financial burden for the taxpayers concerned, which can only be counteracted in certain cases by installment payments, the intention to return and, if necessary, a temporary deferral of tax payments in the current version of Section 6 AStG.

The Annual Tax Act 2025 amends the Investment Tax Act (InvStG) by adding a new paragraph to both Section 19 InvStG and Section 49 InvStG. These new paragraphs essentially transfer the provisions for the exit taxation of interests in corporations held as private assets to investment funds (section 19 (3) new version of the Investment Tax Act) and to special investment funds (section 49 (5) new version of the Investment Tax Act). In doing so, comprehensive reference is made to the provisions of section 6 of the German Foreign Tax Act (AStG) on exit taxation.

2. Requirements and thresholds

Under the new rules, exit taxation on investment funds should only apply if (analogous to the previous exit taxation on substantial holdings in corporations) a natural person with unlimited tax liability in Germany for at least 7 of the previous 12 years

• has realized one of the above-mentioned exit events and
• holds units in a (specialist) investment fund as private assets.
  

Furthermore, only “significant” cases are to be affected by the new rules. This means that exits in the case of “regular” investment funds (so-called “chapter 2 funds”) are only deemed to be fictitiously sold through an exit if the following thresholds are exceeded:

• holdings of at least 1% of the issued investment units within the last five years or
•  investment units with acquisition costs of at least EUR 500,000.
  
  

The 1% stake held by a private individual in the case of large investment funds is likely to be an exception. In practice, the EUR 500,000 acquisition cost limit is therefore more relevant.
In the case of private individuals investing in special investment funds (so-called “chapter 3 funds”), the legislator generally assumes the existence of a significant case.

Both domestic and foreign funds are covered by the scope of the newly introduced exit taxation on (special) investment fund units. Furthermore, it does not matter whether the units are held in a domestic or foreign securities account of the taxpayer leaving the country. However, interests in different investment funds should be considered separately and not offset against each other. If, for example, the taxpayer has acquired shares in five different investment funds, each with acquisition costs of EUR 400,000, the exit taxation requirement is not met, even if the taxpayer has spent a total of EUR 2,000,000 on his total investment shares.

The new regulations refer to Section 6 (2) to (5) AStG. This means, in particular, that liquidity-preserving options such as installment payments and repatriation rules can also be used in the context of exit taxation for (special) investment funds. On the other hand, the associated notification and cooperation obligations must also be taken into account.

3. Conclusion

Private individuals with substantial holdings in investment funds will face a new tax hurdle if they leave Germany after 2025. If they are planning to leave, they should analyze the effects of the new regulations in detail. In some circumstances, they should also consider possible alternative investment strategies or a targeted shift of their investment holdings.