Key Facts at a glance
- The StoFöG creates greater legal certainty for actively managed funds organized as contractual-type separate pools of assets (Sondervermögen) or corporations (so-called investment funds for tax purposes).
- This creates the possibility of an innovative parallel structure for “trading-inclined” German funds: a fund partnership (GmbH & Co. (Investment-) KG) for most domestic investors in Germany alongside parallel investment by a contractual-type separate pool of assets (Sondervermögen), in particular for investors outside of Germany and for “Spezialfonds” and tax-exempt investors in Germany.
- This eliminates the need for non-German access vehicles and the practical limitations and tax risks linked to such vehicles.
Background – When does it make sense to use a parallel structure?
The tax-transparent partnership (GmbH & Co. (Inv) KG) has been the market standard for German fund structures until now. For non-German and tax-exempt investors as well as for German investors investing via “Spezialfonds qualifying as Investmentfonds”, a German fund partnership is only attractive when the partnership is non-trading for German tax purposes. Direct investments in trading fund partnerships are typically immediately unattractive for non-German investors due to the obligation to make German tax filings.
Obtaining non-trading status for German tax purposes is increasingly difficult to achieve for certain fund strategies or associated with legal uncertainties. In these cases, a parallel fund organized as a contractual-type separate pool of assets (Sondervermögen) may be an attractive alternative structure for non-German and tax-exempt investors.
This is particularly relevant for “trading-inclined” funds that:
- intend to intervene in portfolio company management to add value;
- plan to use NAV facilities or comparable financing instruments; or
- will implement fund-of-funds structures; and
- will approach a broad spectrum of international investors.
New structural approach – Contractual-type separate pool of assets (Sondervermögen) as parallel fund alongside GmbH & Co. (Inv) KG
Basic concept
The long-established structure of a tax-transparent partnership (GmbH & Co. (Inv) KG) remains an appealing way to structure a “trading-inclined” fund for non-tax-exempt German investors and continues to allow non-tax-exempt German investors, in particular corporations, an attractive taxation of equity capital gains on the basis of nearly complete exemption from tax pursuant to the participation exemption (Beteiligungsausnahme, § 8b KStG).
In parallel, a co-investing separate pool of assets (Sondervermögen) can be established in a way tailored to the needs of non German investors and certain groups of German investors, such as certain tax-exempt investors and natural persons.
A fully authorized alternative investment fund manager (AIFM) can establish and manage such a contractual-type separate pool of assets (Sondervermögen). Registered small authorized AIFMs and EuVECA managers can work together with suitable AIFMs as service partners.
In contrast to cross-border structures, this entirely German parallel structure does not raise tax issues on substance or place of management. Moreover, investors have direct access to the German fund manager.
Tax advantages of a contractual-type separate pool of assets (Sondervermögen) under the StoFöG
For investment funds, the StoFöG significantly raises the threshold at which implementing investment strategies can result in so-called active entrepreneurial management (“aktive unternehmerische Bewirtschaftung”). This makes it possible for general tax neutrality at the level of the investment funds, with the result of reduced tax leakage in keeping with the aim of a (tax) neutral fund investment.
The new system expressly provides that holding investments only constitutes active entrepreneurial management and causes adverse tax treatment when the investments are held exclusively or predominantly for the purpose of short-term sale. In consequence, influence can be exerted on portfolio companies more broadly than was previously possible for non-trading fund partnerships. Incurring debt (for example, through NAV facilities) and fund-of-funds structures should be tax neutral as well.
As a contractual-type separate pool of assets (Sondervermögen) is tax-opaque, non-German investors will not be subject to German income tax and corporate tax filing obligations. Distributions by a contractual-type separate pool of assets (Sondervermögen) that is an investment funds to non-German investors are also not subject to withholding tax (capital gains tax).
German tax-exempt investors can invest in contractual-type separate pools of assets (Sondervermögen) without risks in connection with individual tax exemptions. In the case of natural persons investing in contractual-type separate pools of assets (Sondervermögen) that qualify as stock funds, mixed funds or real estate funds, additional partial tax exemptions (Teilfreistellungen) are applicable that can lead to tax rates lower than the flat tax rate of 26.375% (including solidarity surcharge).
Summary and Outlook
A parallel structure consisting of a tax-transparent partnership (GmbH & Co. (Inv) KG) and a contractual-type separate pool of assets (Sondervermögen) will allow German fund managers to offer a robust tax structure for all investor groups: Most German investors will profit from the long-established tax transparency of a partnership, whereas international and certain German tax-exempt investors, Spezialfonds qualifying as Investmentfonds and in certain cases natural persons can benefit from tax efficiencies of the contractual-type separate pool of assets (Sondervermögen) structure. The StoFöG increases legal certainty and strengthens Germany’s competitive position as a funds jurisdiction.