It may be of interest to foreign asset managers and custodian banks that the German government recently presented a plan to stabilize the statutory pension system. The central component of the plan is the establishment of a capital-covered fund in the legal form of a foundation under public law with legal capacity called “Generationenkapital”. The foundation is established by law.

The purpose of the Generationenkapital foundation is to generate income from the management of the foundation’s assets by investing on the capital market, from which a long-term contribution is to be made to stabilizing the contribution rate to the general pension insurance.

The foundation is to start with assets of 15 billion Euro, which will grow to 200 billion Euro over a period of around 10 years. The legal regulations on the foundation’s investment guidelines follow the rather conservative provisions for insurance companies.

The operational management of the future foundation is to be transferred to the Fund for the Financing of Nuclear Waste Management (KENFO), which has already existed since 2017 and currently manages assets of around 24 billion euros.

As far as the operational structure of the future Generationenkapital foundation is concerned, it is to be expected that its structure will generally correspond to that of existing KENFO:

External asset management companies have been mandated to manage KENFO’s assets in order to utilize their resources and expertise.
KENFO’s own team controls the allocation of the individual sub-segments via strategic and tactical decisions and risk management.
KENFO’s assets are predominantly managed in a German special fund of a master asset management company (“Master-KVG”).

With regards to taxation, the current draft of the Act on the Generationenkapital foundation does not state whether the foundation will be fully or partially tax-exempt and whether it will owe 15% WHT on German dividends. However, if the future foundation will be subject to the same tax regulations as the existing KENFO, the foundation is likely to be taxed as follows:

KENFO is not subject to corporation tax or trade tax in Germany.
No German WHT is to be deducted from KENFO’s investment income. If WHT has nevertheless been levied, the party obliged to withhold tax must refund the WHT to KENFO.
The payments and benefits distributed by KENFO are not subject to WHT.
For the purpose of double taxation treaties, KENFO is deemed to be a resident of Germany and subject to German taxation.

It is not yet foreseeable whether and with what detail of regulation this initiative of the German government will actually be implemented.

If you wish to discuss these topics, please contact:

WTS Germany