On 20 January 2021, the German Federal Ministry of Finance published the long-awaited supplement to the letter on the application of the German Investment Tax Act (Investmentsteuergesetz) dated 21 May 2019. This original version did not address so-called special investment funds (Spezial-Investmentfonds). Drafts of a supplement were issued in December 2019 and in June 2020. Until now, the German tax administration had not made final statements on important aspects of the eligibility for acquisition of investments in closed-ended alternative investment funds under the reformed German Investment Tax Law (Investmentsteuergesetz) that has been in force since 2018.
The supplement contains certain important clarifications, although it also leaves questions open:
- Acquiring interests in closed-ended funds as securities remains generally permissible for a special investment fund (Spezial-Investmentfonds).
- Investments in closed-ended funds that are classified as securities are not counted towards the limitation of 20% of the value of the special investment fund (Spezial-Investmentfonds) for investment tax purposes.
- Investments in unlisted corporations, whether held directly or via a partnership, must represent less than 10% of the respective corporation. The supplement leaves open the question of whether this 10% limit also applies in respect of investments in a closed-ended fund organized as a corporation.
- Uncertainty continues to exist in other respects in relation to the eligibility for acquisition of investments in partnerships and their application towards the 20% limit.
Certain aspects addressed in the supplement are relevant for special funds (Spezialfonds) structured as special investment funds (Spezial-Investmentfonds) for German tax purposes and thus subject to the semi-transparent tax regime under chapter 3 of the German Investment Tax Law (Investmentsteuergesetz). Special funds (Spezialfonds) are utilized for the capital investments of many German institutional investors, including increasingly for investments in closed-ended funds.
The tax treatment as a special investment fund (Spezial-Investmentfonds) is conditioned on compliance with certain product requirements that also relate to the investment restrictions and activities of the special investment fund (Spezial-Investmentfonds). Compliance is critical in practice, since certain violations of the requirements can result in an irreversible loss of the tax treatment.
Essential aspects in detail
It is good news that the supplement confirms that investments in closed-ended funds, including funds classi-fied as investment funds (Investmentfonds), can be deemed securities for German investment tax purposes and can thus can qualify as so-called “eligible assets” for a special investment fund (Spezial-Investment-fonds). This applies for closed-ended funds structured as corporations or contractual-type funds (Sondervermögen). A draft circular issued in December 2019 had prohibited the acquisition of interests in closed-ended funds structured as corporations or special assets (Sondervermögen). This would have had an effect in particular on numerous Luxembourg fund-of-fund structures and feeder fund structures organized under various Luxembourg regulatory regimes as, among others, a fonds de commun de placement (FCP), société anonyme (SA) or société commandite par actions (SCA). It has now been clarified that these fund interests can be eligible assets not only for investment supervisory purposes, but also for investment tax purposes as well.
A new clarification states that interests classified as securities are not applied towards the 20% upper limit, which limits investments of a special investment fund (Spezial-Investmentfonds) in unlisted shares to 20% of the value of such fund. This can become relevant for special investment funds (Spezial-Investmentfonds) not otherwise subject to a corresponding 20% limit for supervisory reasons, for example in the case of the frequently employed open-ended domestic special AIFs (Spezial-AIF) with fixed investment restrictions (§ 284 KAGB [Kapitalanlagege-setzbuch, German Investment Code]). For similar foreign special funds (Spezialfonds) or general open-ended domestic special AIFs (Spezial-AIF) (§ 282 KAGB), the result may be greater flexibility to pursue opportunities in the alternative investment space to the extent consistent with applicable investor-side considerations (e.g. in respect of consolidation questions or requirements under insurance supervisory legislation).
By contrast, the supplement does not provide for an express privileging of investments acquired as “securities” in closed-ended investment funds (In-vestmentfonds) organized as a corporation in respect of the 10% limit, ac-cording to which the investment in a corporation must represent less than 10% of the corporation’s capital. Certain open-ended investment funds organized as a corporation are expressly excluded from the scope of the 10% limit, but this is not the case for closed-ended investment funds invested in as “securities”. It is unclear whether this relates to an oversight in the Circular.
The reach of the inclusion of investments in trading partnerships as among the assets relevant (i.e., generally impermissible) for the so-called “contamination threshold” (Schmutz-grenze) remains unclear. Our understanding is that the law does not rule out investments in investments in closed-ended AIF partnerships that are trading either intrinsically or via so-called “infection” to the extent that such investments can be classified within the catalogue of eligible investments (in particular securities). The supervisory law for undertakings for collective investment in transferable securities (UCITS), which also governs under the German Investment Tax Law (Investmentsteuergesetz) via an express statutory reference, permits classifying investments in closed-ended funds (including those orga-nized as a partnership) as securities pursuant to conditions codified in the Eligible Assets Directive. For investment tax purposes, interests in trading AIF partnerships may no longer apply towards the investor-oriented 20% value limit, and may thus remain eligible (in particular as securities), if they comprise over 20% of the value of the special investment fund (Spezial-Investmentfonds). The supplement only provides for counting towards the 20% limit in “old cases” in which interests in trading AIF partnerships were ac-quired prior to 28 November 2013 as so-called company participations (Unternehmensbeteiligungen).
In respect of investments in non-trading partnerships (including if they qualify as AIFs), the supplement requires a look-through to the assets held by such partnerships. This also applies for partnerships that do not have trading operations themselves (gewerblich tätig), but which are imprinted as trading (gewerblich geprägt). The concept of the look-through is in opposition to the supervisory-law classification of investments in partnerships as an asset. Given the fact that the product requirements applicable to special investment funds (Spezial-Investmentfonds) are materially driven by supervisory law, this opposition generates difficulties in practice. In our opinion, a look-through should not be required if an interest in a partnership is eligible as a security.