I. AIFM Tax Act

In our Client Information dated 28 June 2013 we provided information that negotiations on the German Act on the Adaption of Investment Fund Taxation in Connection with the AIFM Directive (the "AIFM Tax Act") had temporarily halted. Now, the negotiations of the Conciliation Committee (Vermittlungsausschuss) have ceased altogether. Accordingly, it is highly unlikely that the legislative process regarding the AIFM Tax Act can be completed prior to the Federal Election on 22 September 2013.

II. Impact

The material consequences of the failure of the AIFM Tax Act are as follows:

1. Transitional Order of the German Federal Ministry of Finance

The Financial Authorities introduced certain transitional rules by way of a ministerial circular dated 18 July 2013 (BStBl. I 2013, p. 899). Under this circular the abolished German Investment Funds Act (Investmentgesetz) is deemed to remain in force solely for tax purposes after 21 July 2013.

2. Preexisting Regulated Investment Funds

Although it is uncertain whether this transitional rule is consistent with the German law, we expect no adverse tax consequences under the German Investment Funds Tax Act (Investmentsteuergesetz) for preexisting regulated investment funds and their investors.

3. Closed-End Funds

The tax treatment of closed-end funds such as private equity and infrastructure funds that did not fall within the scope of the abolished German Investment Funds Act so far should not be affected by the failure of the legislative process regarding the AIFM Tax Act.

4. FCP, FCPR, Fondo Chiuso

The classification of certain asset pools of a contractual type such as Luxembourg FCPs, French FCPRs or an Italian Fondo Chiuso for German tax purposes should remain unaffected. There should be no risk of a taxable event due to a change in the classification for German tax purposes (transparent vs. opaque) for the time being.

5. Participation Exemption

The so-called participation exemption (i.e. exemption for dividends and capital gains pursuant to § 8b of the German Corporate Income Tax Act) remains in effect (to the extent applicable) with respect to income from shares in closed-end funds organized as companies (e.g. Luxembourg S.A. SICAV-SIF).

6. Specialized Investment Funds

Specialized investment funds need not comply with the new set of criteria for Qualifying Investment Funds proposed to be introduced by the AIFM Tax Act for the time being. Rather, specialized investment funds may continue to invest in closed-end funds, in particular closed-end funds organized as partnerships, without interfering with their tax status (subject to any applicable regulatory requirements).

III. Next Steps

1. New Legislative Procedure Necessary

Although it is theoretically possible that the legislative process regarding the AIFM Tax Act may be completed prior to the Federal Election on 22 September 2013, we do not expect that this will happen. In particular, as of today there are no (extra) sessions of the Conciliation Committee (Vermittlungsausschuss) or the German Bundestag scheduled.

Due to the prorogation between two legislative sessions, a completely new legislative process would have to be launched after the Federal Election. How quickly such new legislative process could be initiated and what the content of a new draft bill would be depends on the political situation after the Federal Election.

2. Retroactive Effect?

The prorogation between two legislative sessions may have an impact on the date of entry into force of a new act and possible grandfathering rules. A retroactive entry into force or a cutoff date for the grandfathering rules in the past may give rise to constitutional implications due to recent decisions of the German Constitutional Court.

Given the uncertain situation, any ongoing projects should be planned carefully and with sufficient flexibility to implement changes that may become necessary due to future changes to the applicable law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.