ISLA has been informed by EY that a revised draft of the guidance notes to accompany the German Investment Tax Act are imminent. This has reportedly been sent to the Federal States for review and it is possible the revised circular will be published within 10 days.
The BMF (Germany’s Finance Ministry) has verbally confirmed to EY what the guidance will be: ‘the tax base for securities finance transactions will be capped at the level of the underlying gross dividend’. In effect, this means that where a manufactured dividend is paid on the basis of a regular lending agreement, then fees do not need to be taxed. The reason the circular is worded this way, rather than simply “fees are out of scope”, is quite specific and an anti-avoidance provision – it is to prevent counterparts agreeing to reduce or eliminate the (taxable) manufactured dividend and increase the (non-taxable) fee instead. This is clearly very good news.
The obligation to pay the tax over: having revisited constitutional laws in the context of the circular published in November 2017, the BMF are now clear that a non-German borrower cannot act as a withholding agent for tax due by another party. This means, therefore, that the recipients of income (generally in-scope lenders) are obliged to file a tax return and pay the tax at that point. This second point, it seems, is a fundamental matter of German law and would not be a position we could negotiate on further.
In ISLA’s letter submitted to the BMF, they set out that it would allow for optionality so that it would be between lender and borrower to agree who collected the tax and this would be covered in an addendum to the GMSLA. With this latest clarification, work on a market standard German Tax Addendum has been suspended and will only resume if there is a requirement to do so once the circular has been published. ISLA will look to submit requests to the BMF for further clarification, where needed, at a detailed level.