Previously, fund sponsors, industry groups and advisers have all highlighted the important role of a fund-friendly tax and legal regime in Germany, particularly to maintain and enhance Germany´s venture capital finance industry. On 20 January 2021, the German government published the Ministerial draft bill of the act implementing the Cross-border Distribution of Funds Directive and a number of changes to the German Capital Investment Code (KAGB) which make targeted improvements to the conditions that must be in place to establish an investment fund in Germany. The act is referred to as the Act to Promote Germany as a Fund Jurisdiction – Fondsstandortgesetz (FoG).
The draft legislation consists of numerous regulatory provisions and affects various important areas of law, including VAT-exempt management fees for venture capital funds, electronic communication proceedings with the German regulator (BaFin), tax reliefs for employee participations, closed-end and open-end funds as well as statutory provisions on pre-marketing.
Key points for asset managers
The draft legislation contains a number of provisions that will be of interest to asset managers. Some of the more important provisions are set out below:
- An immense disadvantage for German funds when compared to their global and European competitors has been the imposition of VAT on management fees. Arguably this has been the largest single obstacle when setting up a fund in Germany. The draft act expands the VAT exemption for management services to venture capital funds, therefore improving Germany’s attractiveness as a fund jurisdiction.
- According to the draft act, almost all administrative proceedings with the BaFin under the KAGB, are to be processed via an electronic communications system which will be able to clarify and expedite proceedings, especially in an international context.
- Currently, for closed-end funds, only an investment stock corporation (with fixed capital) or an investment limited partnership is permissible. The draft act introduces closed-end pool-type funds (§139 KAGB-E). This means that funds with illiquid assets will have for the first time meaningful access to the legal framework of segregated assets. Pool-type funds are a market standard and attractive to German investors, inter alia, because their units can be held in a securities account.
- Open-end infrastructure investment funds also structured as segregated assets (§§ 260a-d KAGB-E) are to be introduced as well to provide a suitable fund vehicle for retail investors to invest in infrastructure project companies.
- The draft act permits closed-end retail alternative investment fund (AIF) as master-feeder structures (§§ 272a ff. KAGB-E), meaning a closed-end retail AIF is allowed to invest into another closed-end retail AIF.
Another key area covered by the draft act is pre-marketing. Significantly, when finalised the draft act will bring this activity within the regulatory perimeter requiring approval from the BaFin. The proposed provisions are based on those found in the Alternative Investment Fund Managers Directive, which was amended in 2019 with the intention of standardising the different Member State regulations on approaching investors in the run-up to sales.
The draft act provides that pre-marketing will be permitted for AIFs that are only available to professional and semi-professional investors in the EEA, subject to certain limitations on the duration and information which may be provided.
Critically, a subscription to an AIF which was mentioned in information provided through pre-marketing or was established and registered as a result of pre-marketing within 18 months from the commencement of pre-marketing, is deemed to constitute the result of marketing and will therefore be subject to standard marketing rules. The intention behind this is to prevent fund units being acquired by investors through pre-marketing without proper notification for distribution.
As reported by the legislator, the introduction of regulatory measures on pre-marketing shall not affect the recognition of reverse solicitation (where the alternative investment fund manager is approached by the investor).
Real estate funds
Additionally, the proposed change of § 240 KAGB-E should provide relief to shareholder financing of subsidiaries of real estate funds. If the real estate investment fund holds a 100% interest in the real estate company to be financed, there is no cap for the loan. The rationale is that there is no difference in terms of risk between holding shares in the subsidiary and extending a shareholder loan to the subsidiary.
Once the draft act is finalised it will come into force on the day after its promulgation.
Currently, the draft act provides that the VAT exemption will apply from 1 July 2021. Electronic communications will apply later on 1 April 2023 given the need for extensive preparations.