In the last year of the current Grand Coalition, the German Federal Ministry of Finance has made a remarkable proposal: an Act to Strengthen Germany as a Fund Jurisdiction. For over two decades, fund sponsors, industry groups and advisers have stressed the importance of a fund-friendly tax and legal regime in Germany, in particular to retain and strengthen Germany's venture capital financing. We have taken a first look for you at the proposed new provisions.
The Fund Jurisdiction Act affects multiple important areas of law, including
- VAT-exempt management fee for venture capital funds
- Electronic communications for proceedings with the German regulator (BaFin)
- Closed-end German special funds can be structured as segregated assets
- Creation of open-end infrastructure funds structured as segregated assets
- Closed-end retail feeder AIFs are to be permitted
- Statutory provisions on pre-marketing
The draft law proposed by the German Federal Ministry of Finance and circulated to industry groups contains a legislative package that realigns numerous regulatory provisions, in particular in the German Capital Investment Code (Kapitalanlagegesetzbuch, KAGB) and also promises an important improvement in VAT treatment.
The draft law contains numerous proposed amendments with as-yet uncertain consequences. The following are of particular significance for the asset classes of private equity and venture capital:
- The VAT exemption for management services for investment funds is to apply to venture capital funds as well in the future. The imposition of VAT on management fee is until now regarded as the largest single obstacle for Germany as a fund jurisdiction and as a massive disadvantage for German funds in comparison to the European and global competition. The proposed revisions would exempt "venture capital funds" (Wagniskapitalfonds) in § 4 no. 8 letter h UStG (Umsatzsteuergesetz, Law on VAT). The term is not defined by statute but at a minimum should include venture capital as a segment; whether buy-out funds are covered as well remains to be seen. The new provision is to apply from 1 July 2021 onward.
- Nearly all administrative proceedings with the BaFin under the KAGB are to be processed via an electronic communications system to be established by BaFin (§ 7b proposed revised KAGB / KAGB-RefE). Digital processing may be able to streamline and expedite proceedings that have at times been cumbersome in the past, similar to the progress made with Germany's electronic commercial register. Given the technical adjustments required, however, these new provisions are not proposed to enter into force until 1 April 2023.
- Closed-end German special funds (Spezial-AIF) can also be structured as segregated assets (Sondervermögen) (§ 139 KAGB-RefE). German private equity and venture capital funds will thus have meaningful access for the first time to the legal framework of segregated assets (Sondervermögen) in lieu of a partnership structure such as the GmbH & Co. KG, as is already available in other European countries (for example with the FCP in Luxembourg). To what extent this possibility will be put into actual practice will nonetheless depend strongly on the relevant tax and insurance regulatory framework.
These changes as well as the further KAGB amendments will enter into force on the day after the law is promulgated.
- Open-end infrastructure investment funds structured as segregated assets (Sondervermögen) (§§ 260a through 260d KAGB-RefE) are to be introduced to provide a suitable fund vehicle for retail investors to invest into infrastructure project companies.
- Closed-end retail AIFs will be permitted as master-feeder structures, meaning that a closed-end retail AIF will be permitted to invest into another closed-end retail AIF (§§ 272a ff. KAGB-RefE). It is unclear whether a market need exists for this double retail AIF construction. The (commercially more practical) concept of a closed-end retail AIF feeder investing into a special fund (Spezial-AIF) master fund is to remain impermissible.
- Pre-marketing (providing information and disclosures regarding investment strategies and investment concepts to potential professional and semi-professional investors) by an alternative investment fund management company is to be defined and regulated by statutory provisions (definition in § 1 para. 19 no. 29a and governing provisions in § 306b KAGB-RefE). This serves to implement an amendment to the AIFM Directive. Pre-marketing, which until now has been an almost entirely unregulated area, will be a regulated activity going forward. The new pre-marketing rules will apply both to German and non-German alternative investment fund management companies.
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.