Cleary Gottlieb successfully represented a German investor in a test case before Germany’s Federal Fiscal Court, the highest German tax court, regarding the taxation of so-called index certificates with a partial repayment guarantee (i.e., 10%). The German Federal Finance Ministry, which participated in the court proceedings, had previously issued a circular according to which even the guarantee to repay only a small part of the issue price causes all of the capital gains realized from the sale of the certificates to constitute taxable income to private investors. The Federal Fiscal Court, however, held that 90% of the gain, (i.e., the portion of the gain that can be allocated to the non-guaranteed part of the issue price), is generally exempt from German income tax. Index certificates with small capital guarantees were issued in the late 1990s to comply with stock exchange requirements at the time. The landmark decision of the Federal Fiscal Court resolves the long-term uncertainty troubling investors holding index certificates.
