Germany could face fund exodus

A move by the German government to attract investments through tax changes could backfire and trigger a large withdrawal of funds from the country by removing a tax break on long-term holdings, according to a German fund manager.

Under the new regulation, expected to begin in 2009:

  • The corporate tax will be cut from 38.6 per cent down to 29.8 per cent.

  • To help recoup some of the loss in tax revenues, all investors will be forced to pay a 25 per cent withholding tax on dividends generated by investments regardless of their duration.

  • Government officials expect the reform will cost the German state 5 billion euros (about U.S. $6.76 billion) a year, for the first four to five years; but say it will also empower the economy.

    Helmut Knestel, a fund manager at Bavaria-based German Capital Management AG, is less sanguine about the benefits of the new regulations:

  • A 100,000 euros (about U.S. $135,332) investment, for example, in a fund yielding 8 per cent a year for the next 30 years could turn into about 900,000 euros (about U.S. $1,218,046) with the current tax regime.

  • Under the reformed system, however, investors could end up with just 650,000 euros (about U.S. $879,669).

    As a result, investors will take steps to protect their investments before 2009, says Knestel:

  • Long-term investors are likely to avoid the tax by increasing their investments in funds before the end of 2008.

  • They may also choose funds of funds to avoid paying out 25 per cent tax every time they change investments.

  • Others will look abroad for opportunities in what he said could result in a significant capital exodus from the country, which has already suffered in the last few years from competition from countries such as Luxemburg.

    Source: Germany could face 'fund exodus' with tax reform due in 2008/09 – fund manager, Forbes, May 10, 2007.

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    For more on International Issues:

    FMF Policy Bulletin/ 15 May 2007
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