ISLA reports wins on German tax act

ISLA received an update from EY representatives following a meeting with Germany’s Ministry of Finance.

Responding to ISLA’s concerns expressed in four principal points, EY advised that:

  1. In-Scope Transactions – The rule will be limited to transactions over the dividend record date only. This is what ISLA requested in our letter and so this is an excellent result.
  2. Tax Base – The tax base will be limited to only the manufactured dividend based upon the amount of original gross dividend. Technically, all payments (all forms of fee and the manufactured dividend) are in scope of the tax, but this is effectively capped at the level of the gross manufactured dividend because that is what the BMF sees as the core tax base for their anti-avoidance intentions. EY’s interpretation is that as long as the manufactured dividend corresponds to the gross dividend, the fees and earnings from collateral are effectively out of scope. If the parties try to shift the amount of the manufactured dividend to the fees, the tax base will be increased by this amount to reach the gross dividend.
  3. Collection of Tax – The collection of tax in the case of a foreign lender and borrower is still in discussion, the withholding obligation is with borrower. The BMF see an issue in obligating the foreign borrower, but acknowledges that in a highly regulated industry, this may be more practicable than requiring funds to file German tax returns. The outcome is still open, but there will be some relief until there is clarity. EY suggested that the best way for this may be for the withholding party (borrower) to put the money in an escrow and wait for further guidance.
  4. Application of a double tax treaty (DTT) – The treaty qualification of manufactured dividend will need more time. There is a tendency to see this as subject to the dividend article or to see this as a treaty override, but currently completely open. The only way to deal with the uncertainty right now for the industry will be to make the refund claims and see how the things will evolve.

According to EY these four principal points need to be confirmed by the Federal States’ representatives and most likely will be communicated by Germany’s Finance Ministry in Q1 2018 in the form of a letter to the industry associations.

ISLA are aware a lot of market participants are busy putting in place German Tax Addendum. There is a desire for an industry standard and as such a first draft that will now be updated based on the above. ISLA understand the need to finalise this as soon as possible so that it can be used and will be working with a select group to finalise.

To conclude, ISLA believe this is a very positive outcome and are well aware of the concerns and uncertainty that has been circulating and hope this will allow you all to continue to participate in lending German equities into 2018.

Read the full release

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