Germany's investment fund business could see its asset volumes slashed in half within months if draft legislation proposing to abolish the tax free speculation period on fund investment is passed by the German parliament on December 18.

And, as a result, a great number of jobs in Germany's investment industry will be lost, according to Hans Karl Kandlbinder, a specialist Spezialfonds consultant.

Kandlbinder believes the effect of the proposed tax reforms could be 'catastrophic', with an enterprise exodus ensuing as companies look to the fiscally more favourable investment realms of Switzerland and Luxembourg to delay tax payment.

The draft law incorporates a number of amendments to present investment rules, including a rise in the investment speculation period ceiling from six to 12 months. This is countered though by the implementation of capital gains tax on any business trading of papers during this time, where no fiscal penalty previously occurred.

Companies normally paying 50% capital gains tax when distributing gains to investors, for example, will now be subject to the same tariff in this preliminary investment stage.

There will be no way to avoid this new taxation in Germany, so investors will look abroad to avoid or delay payment until they produce their final fiscal returns - but this will not be an illegal tax flight. This could destroy the buoyant German investment market as we know it," Kandlbinder stresses.

He is particularly concerned at the effect of such reforms on the booming Spezialfonds market, which he says is driven by its present tax free aspects.

Another worrying aspect for German investors is that the new law is set to be introduced without a judicial hearing - although opposition is hardening amongst German investment companies and associations to ensure the draft is not steamrollered through to become legislation.

However,Volker Weiss, head of the taxation arm at the Bundesfinanzministerium, says the proposed law is just a levelling out of investment discrepancies between companies and individuals .

He also denies the bill will be rushed into law. "We will present our conclusions to parliament in December, but I expect this taxation debate to run on into the spring of 1999 before any final decision is made." Hugh Wheelan"

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