The German Investment Tax Reform Act (InvStRefG) has been adopted and will take effect on 01.01.2018. Life insurers should immediately become familiar with any changes to ensure their investment taxes are declared correctly. The goal of the reform is to ensure regular investment funds are taxed with corporate taxes (KSt), as per applicable EU law. This should prevent overly aggressive tax planning and tax shelter schemes. It also seeks to simplify the procedure for taxing mutual funds. When it comes to portfolio management in the life insurance sector, the reform will primarily affect two areas: the taxation of investment funds with corporate taxes and the taxation of investors with capital gains taxes (KESt). At the same time, double taxation must be avoided to ensure earnings are not subject to two times the full amount of the taxes. This will be guaranteed by way of a partial exemption. After the partial exemption, 15% of earnings from mutual funds in life insurance policies will also be exempt (§20 Para. 1 No. 6 EStG Clause 9). This applies to policies with hybrid products as well as policies with internal investments and special funds. Partial exemptions will however only apply to earnings on or after 01.01.2018 and policies as of 2005. On the other hand, any earnings attributed to certified policies (§8 Para. 2 InvStG) as per the Pensions Certification Act (AltZertG) will be exempt. The investment fund must apply for this exemption. In addition, any tax contributions spared by the exemption must be credited back to the policies.
Consequences for policy management:
- When it comes to the partial exemption of 15% of earnings from mutual funds, a distinction must be made between a direct investment and an investment in life insurance policies, as the partial exemption only applies to the latter. Earnings from mutual funds must be correctly divided and allocated for all types of hybrid products. As per the GDV letter from 29.10.2017 on the amendment to the BMF letter from 01.10.2009 (BStBl I p. 1172), life insurance policies that make use of surplus fund investments must also be taken into consideration while implementing the InvStRefG. Likewise, the restriction for earnings on or after 01.01.2018 and for policies as of 2005 must be specified. In addition, the tax exemption amount of 100,000 EUR for appreciations on or after 01.01.2018 in funds that were purchased prior to 01.01.2009 must be taken into consideration.
- Shares of AltZertG policies must be recorded separately and held continuously for the entire calendar year. The time and amount of sold or purchased shares are therefore also relevant. The life insurer must report this information to the custodian bank, which in turn will notify the fund. This reporting must take place no later than one month after the end of the fiscal year (§9 Para. 3 InvStG).
- Any tax contributions that are not paid due to the tax exemption for AltZertG policies must be credited back to these policies. As a result, the fund shall pay these amounts to the life insurer, who in turn will credit the previously reported policies (p. 2). These credits can be processed automatically like a fund distribution in the portfolio management system. The tax contributions may only be reinvested in the policy if the policy was active at the time of the re-crediting of the exemption amount. As an alternative, fund companies can create special funds to be used exclusively in AltZertG policies. If this route is taken, the products must be modeled in such a way as to ensure that these funds can be selected and that they are only authorized for AltZertG policies. Such funds are consequently not mutual funds, and therefore not included in the calculation of the partial exemption.
Modifications will be performed to the interfaces and peripheral systems to allow for the reporting of AltZertG policies and the processing of exemptions. As a result, information such as whether or not an investment involves a mutual fund must be processed in both the policy management and peripheral systems. Furthermore, if no distinction is made between funded pension plans and other policies, then another resource besides the policy management system must ensure that when crediting the exemption amounts, the amounts to be distributed are calculated proportionately for the funded plans. As is usual with regulatory changes, all life insurers are faced with the challenge of implementing this reform both thoroughly and in a timely manner. What’s more, the period between the latest legal specifications and interpretations of the new requirements and the entry into force of the reform is quite short. Conversely, the modifications to the policy management software by the manufacturer, the delivery of the new software to insurance companies, and the integration of the software in the local IT environment can be an extremely lengthy process. It is therefore vital that insurers choose software that is easy to use and configure and work closely with the manufacturer to set it up. This is the best way to deal with regulatory changes such as the upcoming reform.