In our Client Information dated 12 December 2012 we informed about the ministerial draft of a German Act on the Adaption of Investment Fund Taxation in Connection with the AIFM Directive ("Ministerial Draft"). On 30 January 2013 the governmental draft that will be introduced in tsheltering debt under a secured party's security he legislative process has been published* ("Governmental Draft"). Please find below a summary of the material changes in the Governmental Draft:
1. Qualifying Investment Funds
The term "qualifying investment funds" – i.e. UCITS and certain open-end AIFs, that will be subject to a tax regime similar to the investment fund taxation currently in place – has been modified:
- It is sufficient if at least 90% of the value of an AIF comprises of eligible assets.
- PPP project companies will be treated as eligible assets.
- The term "participation in an enterprise" has been restricted to shares of a corporation. Hence, interests in closed-end funds organized as business partnerships are no longer eligible assets (with respect to non-business partnerships see below).
- A real estate fund may hold 100% of the shares of a real estate company. Moreover, the restrictions for leverage applicable to real estate funds have been eased.
The scope of the future tax regime applicable to qualifying investment funds will be converged with the scope of the investment fund taxation currently in place. However, there are certain restrictions as the 20% threshold for participations in enterprises only covers shares of a corporation.
However, the reasons set forth in the Governmental Draft indicate that tax rules shall be applicable with respect to attribution of eligible assets. In particular, an investment in a non-business partnership seems to be an eligible investment for a qualifying investment fund. In this case a qualifying investment fund as partner of such partnership shall be treated as if it held its pro rata share of the assets of the partnership directly.
2. Non-Qualifying Investment Funds
- Nevertheless, the so called partial income taxation and the exemption for dividends and capital gains derived by corporate shareholders shall only apply if the income of the respective corporate-type non-qualifying investment fund is subject to tax at the level of the respective corporate-type non-qualifying investment fund.
- In addition, the provisions of the German controlled foreign companies legislation and the passive foreign investment companies legislation shall be applicable to such corporate-type non-qualifying investment funds in order to ensure that retained proceeds are subject to tax.
3. Transitional Provisions/Grandfathering
The transitional provisions of the Ministerial Draft and the Governmental Draft are substantially the same. However, such provisions have been modified to focus on the relevant issues:
- Investment funds that fall within the scope of the investment funds taxation currently in place but that will no longer qualify as qualifying investment funds under the future provisions, will nevertheless be subject to the tax regime applicable to qualifying investment funds (as amended from time to time).
- A specific proceeding has been introduced in cases where a preexisting fund no longer fulfils the criteria under the investment tax law currently in place. This proceeding is similar to the proceeding introduced for future qualifying investment funds (cf. our client information dated 12 December 2012).
The Governmental Draft does not provide for transitional provisions regarding non-qualifying investment funds. Such funds have to apply the new rules as of 22 July 2013. As a consequence the full amount of dividend distributions of tax-exempt corporations (e.g. Luxembourg S.A./S.C.A. SICAV) will be subject to German corporate income tax as of 22 July 2013 (i.e. § 8b German Corporate Income Tax Act is no longer applicable).
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.