Germany: Adaptions Of Investment Tax Law To German Capital Investment Act – AIFM Tax Act Passed At The Second Attempt

Last Updated: 6 January 2014
Article by Dr Ingo Kleutgens, Thorsten Voss and Dr. Cornelia Wiendl

Keywords: Investment Tax Act, AIFM Implementation Act,

After it had not been passed in the mediation committee in the past legislative period, the act on the adaption of the German Investment Tax Act (Investmentsteuergesetz) and other acts to the AIFM Implementation Act ("AIFM-StAnpG", AIFM Tax Act) has now been adopted at the second attempt. This legislative initiative, which emanated unanimously from the Bundesrat on November 8, 2013, was accepted without any amendments in a shortened procedure by the Deutsche Bundestag in its third session on November 28, 2013 (BR.-Drucks.: 784/13). The next day already, the German Länder approved the draft in their plenary session (BR.-Drucks.: 784/13 (B)). The AIFM Tax Act provides for an adaption of the terminology and the scope of application of the German Investment Tax Act ("InvStG") to the new German Capital Investment Act ("KAGB"), which replaced the previous German Investment Act ("InvG") with effect from July 22, 2013. The new act is substantially similar to the draft that had not been adopted in the mediation committee.

The new AIFM Tax Act is expected to enter into force at the date following the date of promulgation of the act in the German Federal Law Gazette. According to a current press release of the Bundesrat, it is to be promulgated in 2013 still.

Tax Regime

With regard to the taxation of investment funds and their investors, this reformed InvStG differentiates between investment funds and investment companies.

Investment funds

All entities subject to the KAGB which cumulatively fulfill the investment provisions pursuant to Sec 1 para 1b InvStG (new version) will be treated as investment funds. It is a requirement that the assets have been invested following the principle of risk spreading and that no active entrepreneurial asset management takes place.

Sec 1 para 1f InvStG (new version) also defines the legal form in which domestic investment funds may be established. The catalogue comprises asset pools and investment stock corporations (Investmentaktiengesellschaften). Furthermore, the so-called "open investment limited partnership" (offene Investmentkommanditgesellschaft), which had been a highly controversial subject in the legislative procedure, was added to the new InvStG. This type of limited partnership will be treated as an investment fund if the number of its investors is lower than 100; if natural persons are excluded as investors; and if its corporate purpose serves directly and exclusively to cover any operational obligations with regard to retirement provisions. Contrary to what was included in the initial draft, the aforementioned requirements are considered to be not fulfilled if the value of interest acquired by the investor exceeds the value of the operational obligation of retirement provisions. An infringement of these requirements to qualify as an open investment limited partnership will result in the loss of any privileged treatment as an open investment limited partnership, and will entail a fictitious sale of the interest.

The tax treatment of the investment funds and their investors generally corresponds to the tax regime previously in place. Previously existing leeways, however, have been further restricted by new regulations regarding the deduction of business expenses, the distribution order, and the detachment of interest coupons and interest receivable from face value (so-called bond-stripping models).

Investment companies

In the event that entities that are not subject to the reformed InvStG do not fulfill the requirements to be classified as an investment fund, they are treated as investment companies (Sec 1 para 1c InvStG (new version)). The law differentiates between the Personen-Investitionsgesellschaft pursuant to Sec 18 InvStG (new version) and the Kapital-Investitionsgesellschaft (corporate-type non-qualifying investment funds) pursuant to Sec 19 InvStG (new version).

Investment companies in the legal form of an investment limited partnership or a comparable foreign legal form are classified as Personen-Investitionsgesellschaften. They are subject to the general regulations on the taxation of partnerships.

According to the negative delimitation of Sec 19 InvStG (new version), Kapital-Investitionsgesellschaften, in turn, are those investment companies that are no Personen-Investitionsgesellschaften. This includes open types of funds which do not comply with the requirements of Sec 1 para 1b InvStG (new version), as well as closed funds of the type of a corporation (Kapitalgesellschaft). The negative delimitation causes foreign entities that are not comparable with an investment limited partnership, such as Luxembourg FCP or SICAV or French FCPR, in future being subject to the regulations applicable to Kapital-Investitionsgesellschaften. Pursuant to Sec 19 InvStG (new version), Kapital-Investitionsgesellschaften are generally subject to the domestic standard tax treatment for corporations (Kapitalgesellschaften), where the applicability of tax exemptions pursuant to Sec 8b KStG (Corporation Tax Act) and Sec 3 No. 40 EStG (Income Tax Act) on distributions will be restricted: The investor must prove that the Kapital-Investitionsgesellschaft either is based in an EU or EEA member state and is subject to revenue taxation for corporations in this member state, or is subject to a respective taxation of a minimum of 15 percent in a third country. The assumption of assets (Vermögensmassenfiktion) pursuant to Sec 19 para 1 sentence 3 InvStG (new version) will cause foreign Kapital-Investitionsgesellschaften which under previous law were treated as transparent to be in future subject to limited tax liability as regards their domestic revenues. The flat-rate taxation scheme was initially refrained from, which had been debated during the first attempt of the legislative procedure and which would correspond to the penalty taxation for investment funds in accordance with Sec 6 InvStG. However, as the grounds for the act contain a request of the Bundesrat to introduce a respective draft law at a later point in time, another initiative must be expected.

Transitional regulations on the AIFM Tax Act

The new version of the InvStG will enter into force the day after its promulgation in the German Federal Law Gazette. Pursuant to Sec 22 para 1 InvStG (new version), the previously applicable InvStG shall apply in the period between July 21, 2013 and the date of the promulgation. In accordance with the grounds for the act, this shall also apply to investment funds and interest in investment funds that have been launched since the entering into force of the KAGB on July 22, 2013, provided that they comply with the requirements of the InvG in the version applicable on July 21, 2013 on investment funds. The provision is essentially a codification of the letter from the German Federal Ministry of Finance (BMF) dated July 18, 2013 and is supposed to face the legal uncertainty arising from a late coming into force of the AIFM Tax Act.

Sec 22 para 2 InvStG (new version) provides for a grand-fathering provision until the end of the business year ending after July 22, 2016 for any assets which comply with the requirements of the InvStG (old version) and which have been launched pursuant to the previous law prior to the entering into force of the AIFM Tax Act. Until that date, they are classified as investment funds within the meaning of the revision of the act, pursuant to Sec 22 para 2 InvStG (new version). The assets must, furthermore, comply with the investment requirements and borrowing limits pursuant to the InvG applicable in the version of July 21, 2013. The grand-fathering provision will end, pursuant to Sec 22 para 2 sentence 4 et seq. InvStG (new version), if there is a substantial violation of the aforementioned investment requirements and borrowing limits or if, due to modified investment requirements, the assets are classified as a hedge fund for the first time.

There is no grand-fathering provision for entities that are in future to be classified as investment companies. They will thus be subject to the new tax regime immediately with the coming into force of the revision of the act.

Conclusion and outlook

Some time has passed since the beginning of the legislative procedure. The BMF had published the AIFM Tax Act draft bill (Referentenentwurf) as early as December 4, 2012. Following numerous hearings, discussions, and decisions, the market participants must now accommodate to the new legal situation in practice. After being classified as Kapital-Investitionsgesellschaften, particularly asset pools such as FCPs which were treated as transparent pursuant to the previous regulations must adapt themselves to framework conditions that have in fact been modified but are currently not yet entirely clarified. It remains to be seen whether clarifying circulars from the BMF will be published regarding the questions that occurred after the reform of the InvStG, and what consequences must be drawn from this. Altogether, it can be said that there is need for action and observation on the part of all parties involved in the near future, at the latest, however, when the transitional regulations expire.

Originally published December 20, 2013

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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