Government draft of a Location Promotion Act passed

On the 10th In September 2025, the Federal Cabinet adopted the draft for a "Location Promotion Act". The aim is to promote investments in infrastructure, renewable energies and venture capital as well as to strengthen Germany's financial centre. Provided are e.g. Changes for investment funds that bring more legal certainty, but also additional tax burden.

Executive Summary

The Location Promotion Act intends to provide greater regulatory, tax and legal certainty for entrepreneurial investments by domestic and foreign investment funds (e.g., the operation of infrastructure facilities, the acquisition and use of renewable energy facilities, or, in the case of funds of funds, participation in commercial target funds). Such liberalization is accompanied in part by changing the material tax burden and tax compliance requirements. Specifically:

Investments in closed-ended funds are becoming comprehensively eligible for special funds, which are vehicles frequently used by German institutional investors. Investments in closed-ended funds established as partnerships levy a definitive tax burden at the level of the special funds, even for special funds of tax-exempt investors, unless it can be proven that they are only engaged in asset management activities. Certain double burdens will be removed for taxable investors in special funds though.
Private equity funds and private debt funds structured as corporations or as contractual funds that invest directly should not be subject to either corporation tax or trade tax in Germany with respect to a significant amount of their investment activities. Unfortunately, there are still no plans to introduce a corresponding regulation for closed-ended funds established as partnerships.
The draft provides for improved opportunities for both open-ended real estate contractual funds (retail contractual funds) and special funds, e.g., to manage renewable energy sources, operate charging stations for e-mobility, or participate in corresponding companies.

Tax harmlessness of entrepreneurial investments for investment funds

The draft provides a clarification according to which even extensive entrepreneurial activities (e.g., controlling interests in commercial partnerships, direct operation of photovoltaic systems) of an investment fund, even if they are classified for tax purposes as “active entrepreneurial management,” should not affect its tax status. The amendment is primarily intended to create a more legally secure framework for investments in infrastructure and renewable energies. This is very helpful because management companies and investors need to be able to reliably predict whether a fund will be taxed under the special provisions of the Investment Tax Act or under the general tax rules.

Definitive taxation of income from commercial activities

The draft provides for regulations that will ultimately result in income of an investment fund from commercial operations in Germany being subject to corporation tax at the level of the investment fund, provided that the invest- ment fund actively manages its assets in an entrepreneurial manner. While currently investment funds have been able to claim tax exemptions for all commercial income with regard to certain tax-privileged investor groups such as pension funds and pension schemes, in future such income will always be subject to corporation tax at a rate of 15% plus solidarity surcharge as long as they are attributable to a German permanent establishment, provided that active entrepreneurial management is given. It is not always easy to determine in individual cases when active entrepreneurial management takes place. However, the draft provides for some positive clarifications in this regard (see below).

More comprehensive tax exemption for private equity and private debt funds

For investment funds (in the tax sense) that generate income typical for private equity and private debt funds, the draft provides for regulations that should eliminate (at least partially) Germany’s previous competitive disadvantage compared to other fund locations. Due to their add value strategies, these funds have previously been faced with the risk that their activities are being regarded as active entrepreneurial management under the current practice of the financial authorities, with the result that, for example, profits from the sale of shares in portfolio companies are fully taxable at fund level. According to the government draft, the following activities, among others, should expressly not lead to active entrepreneurial management and thus also not to a definitive tax burden at the fund level – which one can already derive from the applicable law if interpreted correctly, but clarifying this in the text of the law should add additional legal certainty:

granting of loans to companies; and
the direct holding of participations in corporations (exception: acquisition with the intention of realizing capital gains after a short holding period).

For the private equity industry, it is particularly noteworthy that the explanatory notes to the draft law expressly state and thus recognize that, in principle, all activities associated with holding investments in corporations, such as co-decision-making on the principles of the target company’s business policy or the performance of supervisory board functions and rights of inspection and audit, do not question the asset management classification of the fund. It is precisely the purpose of a fund investment that a professional manager applies his expertise to his portfolio management activities. The fund manager’s tasks may also include influencing the decisions of the target companies in order to protect the interests of investors. It would be desirable if the concept of harmless “active exercise of shareholder rights” by private equity funds would be incorporated even more clearly into the wording of the law.

The regulations outlined above initially only affect a relatively small portion of the market for closed-ended alternative investment funds, as they only apply to funds established as corporations and contractual funds, but not to the vast majority of closed-ended funds, which are partnerships. The special rules of the Investment Tax Act do not apply to these, but rather the general rules. In our opinion, however, the appropriate classification of the activities of a professional private equity manager as part of the asset management can no longer – also for the tax classification of partnerships – be rejected. These criteria should rather be taken into account as type/fund-specific features when applying the general principles for distinguishing between asset management and commercial operations.

Changes for participations in closed-ended funds

Improvement of “special fund eligibility”

The government draft provides for changes that improve the fundamental eligibility of investments in closed-ended funds by certain special funds. This applies, on the one hand, to so-called open-ended domestic special AIFs with fixed investment conditions (Section 284 KAGB) and, on the other hand, to semi-transparent special investment funds for tax purposes (Section 26 InvStG). The product rules applicable to these types of funds are particularly relevant for institutional investors who, among other things, hold their alternative investments in the form of investments in closed-ended funds via their own special funds. While investments in closed-ended funds have previously only been available to special funds under certain conditions, in future it would be principally permissible to acquire virtually all types of investments in other investment funds. This would be a considerable improvement, particularly for investments in closed-ended funds in the legal form of a partnership.

For special investment funds (Section 26 InvStG) in particular, an acquisition has often only been permissible if the participation in a closed-ended fund could be qualified as a transferable security within the meaning of the product rules for UCITS. While this is often possible under the current Eligible Assets Directive of 2007, the European Securities and Markets Authority (ESMA) has recently proposed changes that would rule out this option in the future (see our client information dated July 21, 2025). This makes the changes to the German product rules for certain special funds now provided for in the draft Location Promotion Act even more significant.

It is unclear whether and how the planned changes will affect certain investment limits (e.g., the restriction on the participation of special investment funds in the tax sense to less than 10% of the capital of a corporation). In addition, it remains to be seen to what extent the capital investment rules for pension funds and pension schemes will also reflect the liberalization of the investment and investment tax law. Hopefully, the Federal Financial Supervisory Authority (BaFin) will promptly adapt its capital investment circular, which is the decisive document for the interpretation of the relevant investment regulation.

Changes in the tax treatment of domestic income from target fund investments

The draft provides for changes in the tax treatment of domestic income from investment funds. This also applies to special funds that invest in target funds in the legal form of a partnership. According to this, the following distinctions must be made:

Income of an investment fund within the meaning of the Investment Tax Act from an investment in a target fund that is an originally commercially active partnership shall, insofar as the target fund mediates a German permanent establishment, always be subject to corporation tax (15% plus solidarity surcharge) at the level of the investment fund. In the future, this shall also apply insofar as tax-exempt investors hold an interest in the investment fund. For special funds of tax-exempt institutional investors, such as pension funds or pension schemes, this represents a material additional tax burden. Until now, investment funds have been able to rely comprehensively on the tax-exempt status of their investors regarding domestic income from permanent establishments. The requirement for the target fund to have a German permanent establishment is clearly stated in the explanatory remarks to the bill but this should ideally also be included in the text of the bill for legal clarity purposes. Unfortunately, the draft did not propose an alternative regulation whereby the income of an investment fund from such an investment would only be subject to corporate income tax if the investment fund itself actively manages its investment in the commercial target fund (e.g., by intervening in the management of the target fund).
Under the draft law, income earned by an investment fund from a partnership engaged solely in asset management is not subject to taxation at the investment fund level per se, even if the partnership is commercially “infected” or is “characterized as commercially”. This can lead to a material tax relief for investment funds regarding their taxable and foreign investors. However, this requires proof that the partnership is only engaged in asset management. How this proof can be provided is currently still unclear and should be specified in a letter from the Federal Ministry of Finance. Domestic dividends and domestic real estate income conveyed through partnerships will continue to be captured though.
Unfortunately, the draft does not provide any relief regarding the double taxation of certain income from investment funds conveyed through partnerships whose investors are taxable in Germany and not tax-exempt. There is still no partial exemption mechanism for income from investment funds conveyed through partnerships, as provided for in investment tax law in comparable constellations.

Removal of barriers to direct investment in infrastructure and renewable energies

The draft provides for improved opportunities for both open-ended real estate investment funds (retail investment funds) and special funds to operate renewable energy management facilities or charging stations for e-mobility or to invest in corresponding companies. In addition to the necessary investment law provisions, the draft also contains changes regarding the tax treatment of corresponding income:

In the case of investments in companies for the management of renewable energies, infrastructure or public-private-partnership project companies, he fund’s income from these investments does not affect its exemption from trade tax and is also not subject to trade tax (unlike its own income from commercial activities, including the management of renewable energies or the operation of infrastructure facilities) as income from the investment fund’s own commercial activities. The regulation is important in practice because it reduces the risk of an investment fund losing its fundamental trade tax exemption.
Semi-transparent special investment funds should be able to hold investments in companies that manage renewable energies without jeopardizing their tax status. Investments in such companies and in infrastructure project companies should be allowed regardless of the general limit of 10% for investments in corporations.
The scope to which special investment funds may engage in activities subject to trade tax without jeopardizing their tax status shall also be expanded. The management of renewable energies and charging stations for e-mobility in connection with the rental and leasing of real estate and investments in corresponding companies, as well as in real estate, infrastructure, or public-private-partnership project companies, and investments in investment funds of all kinds, should be harmless for their tax status. No upper limit should be applied in this respect.

Outlook

Most of the planned changes are to come into force on January 1, 2026. Accordingly, implementation of the law is planned for later this year. From an industry perspective, this would be very welcome.