On 17 December 2015 the German Ministry of Finance (Bundesfinanzministerium) circulated its consultation draft bill on the reform of fund taxation (‘Ministry’s Draft’). The Ministry’s Draft still contains a complete revision of the German fund taxation regime. On a positive note, the abolishment of the 95% participation exemption for gains from portfolio shareholdings has been dropped due to a change of political agenda.

On a negative note, in addition to the revision of the German fund taxation regime, the Ministry’s Draft contains significant changes to the rules on domestic tax credits and refunds on dividends. These changes are aimed to counter-act so-called “Cum/Cum” transactions, a form of withholding tax arbitrage.

If introduced as currently drafted, the rules could result in massive distortions of the German equity markets. Hereinafter we discuss the proposed changes in relation to domestic tax credits and refunds. We will inform you about the revision of the German Investment Tax Act separately in due course.