[A-List] Germany: upsetting financial capital

["Michael Keaney" <michael.keaney@xxxxxx>]

Top firms tackle German tax law
By Florian Gimbel
Financial Times, FTfm: December 2 2002

A coalition of US and European fund managers is to mount a campaign against
the German government, amid fears that proposed new tax laws could force
them "out of business" in one of the continent's biggest mutual fund
markets.

The German government is preparing to force investors in funds run by
foreign managers to pay twice as much capital gains tax as investors in
domestic funds.

But an 11-strong network of foreign fund managers - along with some of
Europe's top fund management trade associations - have asked for urgent
talks with Frits Bolkestein, the European commissioner for the single
market. Letters from the group are also being sent to every member of the
Bundestag, the German parliament.

Alan Ainsworth, deputy chairman of Threadneedle Investments, a UK fund
manager and one of the campaign's co-ordinators, said: "The new proposal
would result in the most blatant breach of single market obligations we have
ever seen. This renders foreign funds unsaleable in Germany."

The German government - including Hans Eichel, the finance minister - is
already facing criticism from fund managers over its treatment of dividend
income from non-domestic funds.

Under current law, investors in foreign-domiciled funds have to pay tax on
their total dividend income. By contrast, investors in domestic funds only
pay tax on half their dividend income. This principle could be applied to a
new capital gains tax, under proposed measures due to be introduced in
February 2003.

If this happened, investors in non-domestic funds would end up paying more
than twice as much capital gains tax as investors in domestic funds.

This would significantly reduce the investment returns of foreign products,
since capital gains account for up to 90 per cent of the investment income
from mutual funds.

Thomas Balk, president of Fidelity Investment Services, the US fund manager,
said: "This effectively kills the single market for investments. Twenty
years of work of putting the UCITS [the European 'passport' for cross-border
funds] in place would be lost."

In an unprecedented move, the BVI, the German mutual fund association, has
agreed to campaign alongside foreign fund managers. This is largely because
several German groups are worried about the future of their
foreign-domiciled funds.

According to FERI, a research consultancy, non-domestic funds run by foreign
managers account for 14.4 per cent of German retail assets. Non-domestic
funds run by German groups account for another 25 per cent. In all, nearly a
third of German retail assets could be affected by discriminatory tax
treatment.

Critics fear that the new proposal could also lead to a significant
reduction in the number of products. Of the 5,650 funds registered in
Germany at the end of March, some 80 per cent are domiciled outside Germany,
mostly in Luxembourg or Dublin.

The German government has promised a "revision" of the laws that govern the
tax treatment of foreign investment products by the beginning of 2004. In
what appears to be a nod to its critics, the government writes: "It is
intended . . . that the legal and tax relevant regulations will be revised
in principle. EU law requires such revision."

But fund managers fear that one year of discriminatory tax treatment will be
enough to inflict irreparable damage. Little help, meanwhile, is expected
from the European Commission, which has yet to act on complaints from fund
managers about the German treatment of dividend income.

"Whatever the government decides to do, we'll be out of business by then,"
said Mr Balk.

He believes that Berlin has yet to grasp the irony of its proposal. "The
rationale for all this is based on the assumption that [non-domestic] fund
volume will stay there, but these funds may actually disappear," he says.
"All this will do is encourage capital flight."