Judgment;Summary — ECLI:EU:C:2023:339
Date: 2023-04-27
Language of the case: German
Court formation: First Chamber
Subject matter: Free movement of capital
Procedure: Reference for a preliminary ruling
Origin: Germany

Summary C-537/20 – 1 
Case C-537/20 
Summary of the request for a preliminary ruling pursuant to Article 98(1) of 
the Rules of Procedure of the Court of Justice 
Date lodged: 
21 October 2020 
Referring court or tribunal: 
Bundesfinanzhof (Germany) 
Date of the decision to refer: 
18 December 2019 
Applicant and appellant in the appeal on a point of law: 
L Fund 
Defendant and respondent in the appeal on a point of law: 
Finanzamt D (D tax office) 
  
Subject matter of the main proceedings 
Specialised property fund – Corporate income tax – Distinction between domestic 
and foreign specialised property funds – Exemption from corporate income tax 
only for domestic specialised property funds – Difference of treatment – 
Justification 
Subject matter and legal basis of the reference 
Interpretation of EU law, Article 267 TFEU 
Question referred for a preliminary ruling 
Does Article 56 of the Treaty establishing the European Community (now: 
Article 63 of the Treaty on the Functioning of the European Union) conflict with a 
rule in a Member State, by virtue of which domestic specialised property funds 
with exclusively foreign investors are exempt from corporate income tax, while 
foreign specialised property funds with exclusively foreign investors are subject to 
EN 
SUMMARY OF THE REQUEST FOR A PRELIMINARY RULING – CASE C-537/20 
 
2  
limited liability for corporate income tax on their rental income obtained within 
the Member State? 
Provisions of EU law cited 
Article 63 TFEU 
Provisions of national law cited 
Körperschaftsteuergesetz (Law on corporate income tax, ‘the KStG’), in particular 
Paragraph 1(1)(5) and Paragraph 2(1); 
Investmentsteuergesetz 2004 (Law on investment income tax, ‘the InvStG 2004’), 
in particular Paragraph 4(2)(7), Paragraph 11(1)(1) and (2), Paragraph 15(2)(2). 
Loi du 13 février 2007 relative aux fonds d’investissement spécialisés 
(Luxembourg Law of 13 February 2007 relating to specialised investment funds) 
Summary of the facts and proceedings 
1 The applicant is a fonds commun de placement (‘common fund’) in the form of a 
specialised investment fund, which was launched in 2008 in accordance with the 
Luxembourg Law of 13 February 2007 relating to specialised investment funds, 
and which is subject to investment supervision in Luxembourg (Commission de 
Surveillance du Secteur Financier; ‘CSSF’). The applicant has neither a registered 
office nor company management in Germany. 
2 A specialised investment fund concerns an undivided collection of assets 
authorised by CSSF, which is structured according to the principle of risk 
spreading and managed by a management company on behalf of the collective of 
investors. The liability of investors is limited up to the amount of their deposit and 
the rights of investors are embodied in their shares (see Article 4 of the 
Luxembourg Law of 13 February 2007 relating to specialised investment funds). 
A fund of this type has no legal personality of its own. 
3 As a specialised investment fund, the applicant is not subject to taxation in 
Luxembourg, with the exception of the capital duty payable by civil-law 
companies and commercial companies, and subscription tax in accordance with 
Article 68 of the Luxembourg Law of 13 February 2007 relating to specialised 
investment funds. The amounts distributed by the applicant are not subject to 
withholding tax in Luxembourg and are not taxed where a recipient is a non-
resident (see Article 66 of the Luxembourg Law of 13 February 2007 relating to 
specialised investment funds). 
4 The applicant was initially set up for ten years as a closed-end property fund 
without stock market valuation. 
L FUND 
 
3 
5 When the applicant was terminated, all property investments that were not already 
liquidated were liquidated, and the sale proceeds were distributed to the 
shareholders. The management company is prohibited from distributing the 
portfolio whether in whole or in part to the shareholders in the form of a 
distribution in kind. Accordingly, the shareholders also have no entitlement to a 
distribution in kind. The shareholders are not permitted to request redemption 
prior to expiry of the applicant’s contractual term. 
6 The applicant has two institutional investors that have neither a registered office 
nor company management in Germany. The fund is managed by a management 
company. The company in question is a limited liability company established on 
25 March 2008 in accordance with Luxembourg law and registered in the 
Luxembourg Trade and Companies Register, with its registered office in 
Luxembourg, which was authorised by CSSF. The purpose of the management 
company is to set up, administer and manage the fund. 
7 By means of a contract dated 31 March 2008/1 April 2008, the management 
company acquired a property portfolio in its own name but while acting as a 
management company on the applicant’s behalf. The portfolio specifically 
consisted of 1 241 properties in Germany, which were let after being acquired, 
and some of them were subsequently sold at a later date. 
8 The applicant received income between 2008 and 2010 from the letting and sale 
of the aforementioned individual properties. 
9 In July 2013, the applicant submitted corporate income tax returns for the periods 
between 2008 and 2010, taking account of a limited liability for corporate income 
tax. However, it pointed out at the same time that, according to its interpretation 
of the law, it is not liable for payment of corporate income tax in Germany. 
10 The defendant, on the other hand, assumed a limited liability for corporate income 
tax and determined corporate income tax. Finanzgericht Münster (Münster 
Finance Court), which heard this case, confirmed the interpretation of the law by 
the Finanzamt (Tax Office) in its judgment of 20 April 2017 dismissing the action. 
The applicant subsequently lodged an appeal on a point of law with the 
Bundesfinanzhof (Federal Finance Court). 
Brief summary of the basis for the reference 
11 The appeal on a point of law would be without merit in accordance with national 
law. The referring court initially makes some remarks relating to taxation of 
foreign investment funds, and it explains that foreign investment funds are only 
subject to corporate income tax liability, whether limited or unlimited, if they are 
equivalent to a taxable person for the purpose of German corporate income tax 
according to their economic and legal structure, irrespective of any legal 
personality that may exist in accordance with another country’s law. According to 
the referring court’s established case-law, investment funds equate to a ‘different 
SUMMARY OF THE REQUEST FOR A PRELIMINARY RULING – CASE C-537/20 
 
4  
special-purpose fund under private law’ as referred to in Paragraph 1(1)(5) KStG, 
and are subject to unlimited or limited liability for corporate income tax 
depending on their registered office or the location of their company management. 
12 For the purpose of taxation, national tax law makes a distinction between foreign 
and domestic funds, and between public and specialised funds.  
13 A domestic fund is taxed in accordance with the Law on investment income tax. It 
is generally characterised by the fact that the fund is regarded as a special-purpose 
fund as referred to in Paragraph 1(1)(5) KStG and therefore as a taxable person for 
the purpose of German corporate income tax; however, as such a taxable person, it 
is exempt from corporate income tax (Paragraph 11(1)(1) and (2) InvStG 2004). 
This exemption from tax is systematically linked to taxation of investors. The tax 
exemption of the fund and the corresponding taxation of the investor implements 
the transparency principle, according to which tax is withheld once at the level of 
the investor. The fund investor is treated as a direct investor to this extent. In order 
to ensure taxation of the investor, tax is withheld at source at the level of the fund 
(Paragraph 7 InvStG 2004). 
14 The legislature also follows the transparency principle with regard to taxation of a 
specialised fund. The domestic specialised fund is therefore exempt from 
corporate income tax in accordance with Paragraph 11(1)(2) InvStG 2004, and tax 
is withheld at the level of the investors. The specialised fund is distinguished from 
a public fund by the fact that only non-natural persons are permitted to participate 
in a specialised fund (known as institutional investors), while an indefinite number 
of different investors participate in a public fund. Specialised funds often have just 
one or very few institutional investors that are actually able to exert an influence 
on investment decisions. 
15 In the case of a domestic specialised property fund, income from property is also 
not taxed at fund level but rather at the investor level. The legislature thereby also 
implements the transparency principle in relation to specialised property funds. If 
a domestic specialised property fund has foreign investors, the domestic rental 
income of the fund is directly (proportionately) attributed to the foreign investor 
as personal income with limited tax liability. In order to ensure taxation of the 
foreign investor, a requirement exists to withhold tax at source at fund level 
(Paragraph 15(2)(4) InvStG 2004). The transparency principle and the 
requirement to withhold tax at source are used by the German legislature to 
safeguard its right of taxation of income from domestic property in its capacity as 
the state of situs. 
16 The legislature has implemented the transparency principle in order to counteract 
claims for unjustified tax relief by (large-scale) foreign investors in the property 
sector. Such an investor would, in fact, have been liable for tax to a limited extent 
if investing directly in domestic property. He would have been able to avoid this 
tax liability without any major difficulty when investing via a specialised property 
fund. 
L FUND 
 
5 
17 Consequently, a foreign specialised property fund is not exempt from corporate 
income tax (Paragraph 11(1)(2) InvStG 2004). The direct application of this 
exemption to the applicant fails on the basis of its unequivocal wording, according 
to which only domestic investment funds are exempt from corporate income tax. 
The analogous application of Paragraph 11(1)(2) InvStG 2004 is excluded because 
it lacks any unintentional loophole. The legislature intentionally made a 
distinction between domestic and foreign investment funds. 
18 The result of this rule is that a foreign specialised property fund is required to pay 
tax itself on its income from the letting of property situated in Germany. 
Incidentally, this does not result in taxation of the foreign investors in the foreign 
specialised property fund, and therefore the double taxation of rental income, 
because the national provisions applicable in the main proceedings did not provide 
for any tax liability for foreign investors in the foreign specialised property fund 
in respect of the amounts distributed to them from the fund. 
19 The referring court doubts, however, whether the exclusion of the applicant from 
tax exemption under Paragraph 11(1)(2) InvStG 2004 is compatible with EU law, 
particularly the free movement of capital (Article 63 TFEU). 
20 It makes reference to the judgments of the Court of Justice of 10 May 2012, 
Santander Asset Management SGIIC (C-338/11 to C-347/11, EU:C:2012:286); of 
10 April 2014, Emerging Markets Series of DFA Investment Trust Company 
(C-190/12, EU:C:2014:249); and of 21 June 2018, Fidelity Funds and Others 
(C-480/16, EU:C:2018:480), which it does not regard as relevant, however. In the 
present case, in fact, by imposing the limited liability for corporate income tax on 
the rental income obtained by the applicant, this ensures that domestic income tax 
is only levied once on this income in accordance with the customary international 
situs principle. For a comparable resident specialised property fund, the single 
taxation of domestic rental income is ensured by taxing the investors with limited 
liability for corporate income tax. Consequently, this means that the property 
investment is subject to the same taxation, and the question is raised as to whether 
non-resident funds are actually being prevented from investing in domestic 
property as a result of not being granted tax exemption in accordance with 
Paragraph 11(1)(2) InvStG 2004. 
21 Furthermore, the referring court considers it rather unlikely that domestic 
investors will actually be prevented from purchasing shares in foreign funds that 
are not tax-exempt but rather involve limited liability for corporate income tax. In 
addition to the tax burden at the level of the foreign fund with limited liability for 
corporate income tax, this group of investors who receive distributed payments 
from the fund would have their own unlimited liability for corporate income tax. 
This double taxation is eliminated, however, by the means of withholding in 
Paragraph 4(2)(7) InvStG 2004. Rather, what is more significant is that there is a 
clear distinction between a public fund and a specialised fund. In the latter, a 
narrowly defined group of institutional investors or even an individual investor 
uses such a fund as an investment vehicle for its planned investment in a particular 
SUMMARY OF THE REQUEST FOR A PRELIMINARY RULING – CASE C-537/20 
 
6  
investment object. Where the group of investors is so exclusive, the inclusion of 
potential domestic institutional investors in an examination of the restriction of 
basic freedom may seem a purely theoretical and therefore negligible possibility. 
22 It is also questionable whether the unequal treatment resulting from 
Paragraph 11(1)(1) and (2) InvStG 2004 concerns situations that are objectively 
comparable. In the aforementioned case-law, when assessing the comparability, 
the Court of Justice only referred to the level of the fund but not the investors’ tax 
situation, and it affirmed the comparability of resident and non-resident funds in 
each case.  
23 However, the Court also ruled that, in the examination of comparability, the level 
of the fund could be abandoned and, by way of an exception, the investors’ tax 
situation could also be taken into account, if the statutory rule makes the tax 
exemption of the fund conditional on the requirement that all the profits of the 
fund be distributed to its shareholders, in order to make the tax burden on 
investment proceeds through this fund the same as that on direct investments by 
private investors (see judgment of 10 May 2012, Santander Asset Management 
SGIIC, C-338/11 to C-347/11, EU:C:2012:286, paragraph 40). In the present case, 
although the German legislature did not assume such complete distribution, the 
direct attribution of rental income to the foreign investors resulting from 
Paragraph 15(2)(2) InvStG 2004 and the express attribution of the limited liability 
for corporate income tax on this income extends far beyond the effect of 
(assumed) complete distribution. It particularly expresses that the tax situation of 
the fund is only relevant to the extent that we are concerned with its qualification 
as a specialised property fund, otherwise the investors’ situation must be taken 
into account. As the taxation of property income therefore does not depend on the 
level of the fund but rather on the residence of the investors, this could not support 
the comparability of the situations. 
24 It is furthermore doubtful whether compelling grounds of public interest could 
justify the rule in Paragraph 11(1) InvStG 2004. In each of the three 
aforementioned judgments, the Court of Justice explained that a Member State 
that has chosen not to tax resident funds in receipt of nationally sourced dividends 
cannot rely on the argument that there is a need to ensure a balanced allocation 
between the Member States of the power to tax in order to justify the taxation of a 
non-resident fund in receipt of such income.  
25 At first glance, this affirms that the tax exemption granted to resident funds by 
Paragraph 11(1)(2) InvStG 2004 cannot be justified by relying on the argument of 
the need to ensure the balanced allocation between the Member States of the 
power to tax. However, the legal and factual details of the present dispute could 
give rise to a different assessment in this regard. 
26 By denying tax exemption in accordance with Paragraph 11(1)(2) InvStG 2004 
and justifying the limited liability for corporate income tax on domestic rental 
income in respect of the applicant as a non-resident specialised property fund, the 
L FUND 
 
7 
German legislature is protecting its right of taxation as the state of situs. 
Article 6(1) of the OECD Model Tax Convention also grants the state of situs the 
right of taxation for income from immovable property. In the cases that the Court 
ruled on previously, the nature of the income of the fund was also of relevance to 
this extent in the examination of justification, when it pointed out that the 
dividend income received from the fund had already been subject to taxation on 
income at the level of the distributing company (judgment of 21 June 2018, 
Fidelity Funds and Others, C-480/16, EU:C:2018:480, paragraph 72). There is no 
such withholding tax burden on the rental income received by the applicant. 
27 In the case of a foreign fund with foreign investors, it must be taken into account 
that the right of taxation of the state of situs for domestic rental income cannot be 
ensured without taxation at the fund level. Specifically, a resident fund can be 
required to withhold tax at source, which ensures that foreign investors are taxed; 
this is not possible in the case of a non-resident fund, however. Unlike dividend 
income, there is also no (withholding) tax levied on rental income. 
28 Finally, the exclusion of the applicant from the tax exemption under 
Paragraph 11(1)(2) InvStG 2004 could be justified in order to safeguard the 
coherence of the tax system.  
29 In accordance with the case-law delivered by the Court of Justice in relation to 
funds, an argument based on this justifying circumstance can only be successful if 
there is a direct relationship between the tax benefit in question and its offsetting 
by means of a particular tax burden, whereby the directness of this relationship 
must be assessed in relation to the purpose pursued by the rule in question.  
30 In a case such as the present one, such a direct relationship could be considered to 
exist because the tax exemption of the domestic specialised property fund is 
cancelled out by the direct taxation of foreign institutional investors.  
31 It must still be examined whether or not the denial of tax exemption for the 
foreign specialised property fund extends beyond what is necessary to safeguard 
the coherence of the German system of investment taxation. 
32 If the Court’s remarks in its judgment of 21 June 2018, Fidelity Funds and Others 
(C-480/16, EU:C:2018:480, paragraph 84) are applied to the German taxation 
system, it would depend on the non-resident investment funds, which are not 
granted tax exemption in accordance with Paragraph 11(1)(2) InvStG 2004 and 
are therefore required to pay German corporate income tax, proving that they pay 
a tax that corresponds to German corporate income tax. In the view of the 
referring court, this proof cannot be furnished in a case such as the present 
dispute, because the applicant, as a specialised property fund in Luxembourg and 
having obtained rental income in Germany, is subject to neither (personal) income 
tax nor a requirement to withhold tax at source. 
33 Furthermore, in its judgment of 21 June 2018, Fidelity Funds and Others 
(C-480/16, EU:C:2018:480, paragraph 85), the Court remarked that the refusal to 
SUMMARY OF THE REQUEST FOR A PRELIMINARY RULING – CASE C-537/20 
 
8  
grant funds resident in a Member State other than the Kingdom of Denmark 
exemption from withholding tax leads to a series of charges to tax on the 
dividends paid to their investors resident in Denmark, which runs counter to the 
objective pursued by the national legislation. 
34 If these remarks are also applied to the circumstances of the German taxation 
system, it would depend on whether the refusal to grant funds resident in a 
Member State other than Germany exemption from corporate income tax in 
accordance with Paragraph 11(1)(2) InvStG 2004 leads to a series of charges to 
tax on the income paid to investors resident in Germany. In this context, however, 
we must refer once again to the legal and factual details of the present case. On 
the one hand, intended domestic investors would not be subject to double taxation 
as a result of the means of withholding provided for in Paragraph 4(2)(7) InvStG 
2004. On the other hand, while the applicant, as a foreign fund, is excluded from 
exemption from corporate income tax in accordance with Paragraph 11(1)(2) 
InvStG 2004, it has no investors that are resident in Germany and that could be 
subject to a series of charges to tax on income from property (initially at fund 
level, then at investor level). Its activity as a closed-end specialised fund is also 
not designed to attract such investors, since funds of this type typically involve a 
fixed small number of institutional investors with the same interests, which are 
using the fund as a vehicle for their own investments.