BERLIN - A coalition of 14 international money managers is considering legal action against the German government to halt a proposal to double the capital gains tax on foreign-domiciled investment trusts.
Acknowledging the group's efforts so far had failed, spokeswoman Sheila Nicoll said the firms are considering action under European Union laws that prohibit introduction of discriminatory legislation.
"We have sought legal advice on the matter now, and we are considering our options. We note there are already several precedents in Europe whereby companies have sued for compensation for the loss of earnings linked to the introduction of discriminatory laws," she said.
The proposal, introduced in November by German Finance Minister Hans Eichel, would double the capital gains tax payable by German investors in foreign-domiciled unit trusts.
Experts say if the measure is approved it could wipe out foreign firms' German business.
The proposal extends a 1998 law that doubles the rate of dividend tax payable by investors in foreign trusts.
Some success
Lobbyists for the money management coalition, which includes names such as Fidelity Investments International Ltd., London, and J.P. Morgan Fleming Asset Management Ltd., London, met with German government representatives before Christmas. They also spoke at a Bundestag Finance Committee hearing last month.
"We had some success - the government agreed to remove (a separate) proposal to tax both unrealized and realized earnings from trusts," Ms. Nicoll said.
"It is a bad and horrible situation, and I think it could wipe out foreign fund managers' business, especially the smaller ones that can't afford to be flexible," said Hurgen Kuhn, a partner with PricewaterhouseCoopers, Frankfurt.
The proposal has prompted one money management executive, Deputy Chairman Alan Ainsworth of London-based Threadneedle Investment Management, to muse that his firm's German products would become "unsalable" in Germany if the capital gains tax were doubled.
Germans invest about s70 billion in foreign-domiciled investment trusts, according to the British Investment Management Association, London.
"We are disappointed in the extreme that the government has chosen to levy these measures in such a discriminatory way. It really goes against the spirit of cross-border financial services," said Klaus-Jurgen Baum, managing director of Fidelity Investments' unit in Frankfurt.
Group leaders
The coalition is being led by the Investment Management Association, London, and the Deutscher Investment Fond Vermogensuer Waltungs-Gesellschaften (BVI), Frankfurt, a German mutual fund group. Firms comprising the coalition are Fidelity; Morgan Fleming; Goldman Sachs Asset Management International Ltd.; Gartmore Investment Management PLC; Franklin Templeton Investment Management Ltd.; Henderson Global Investors; Jupiter Asset Management; M&G International Investments; Schroders Investment Management Ltd.; and Merrill Lynch Investment Managers.
The European Commission also has become embroiled in the dispute. It wrote a letter to the German government in December giving Mr. Eichel two months to respond to the allegations of discrimination raised in earlier complaints by the money management industry.
Individual firms previously complained to the European Commission over the 1998 tax measures.
"There is no doubt this is discriminatory; I am 99% sure the German government would get knocked out in the European Court of Justice if it was brought," said David Newton, a partner with PricewaterhouseCoopers, London.
German experts said introduction of the tax was a desperate measure by the Berlin government to help its worsening budget crisis. Chancellor Gerhard Schroeder already is under fire over allegations he misled the public on the state of Germany's finances before the October election. And European Union authorities penalized Germany last year for breaching its budget deficit limit of 3%.
"(Mr.) Eichel was just between a rock and a hard place in terms of the budget. They needed to raise money, and this is what they came up with," said Mr. Kuhn.
