The most important facts in brief
- From 1 January 2024, the management of all AIFs will be VAT-free under German tax law.
- This brings the German VAT situation into line with the legal situation in other EU Member States, such as Luxembourg, and eliminates competitive disadvantages for Germany as a fund jurisdiction.
- The abolition of VAT eliminates a previous cost factor for German AIF structures and increases the capital that can be invested by the AIF, providing considerable advantages for the AIF, its investors and the availability of venture capital.
- The services of investment advisors may also be VAT-exempt in future.
- Alternative investment fund managers (AIFMs) and affected investment advisors should review their structures for consequential effects (in particular with regard to input VAT deduction and existing rental agreements).
- Previous years before 2024 are not affected by the new law.
The new regulations in detail
We previously informed you about the ZuFinG in April of this year. The law, which was then proposed as a draft bill, has now been passed by the Bundestag and the Bundesrat. It will enter into effect on 1 January 2024 following execution and promulgation in the Federal Law Gazette, which are considered assured.
The VAT exemption currently only provided for the management of Undertakings for Collective Investment in Transferable Securities (UCITS) and of Alternative Investment Funds (AIFs) comparable to UCITS as well as of venture capital funds (Wagniskapitalfonds). This VAT exemption will now be extended to the management of all AIFs. The management of AIFs will be exempt from VAT in the future regardless of the type of regulation of the AIF or its AIFM and asset class (i.e., expanding the exemption from PE/VC funds to also encompass funds such as debt funds, real estate funds, infrastructure funds, funds of funds, etc.). The qualification of the investors will no longer be relevant either.
However, as the VAT exemption is linked to the regulatory qualification as an AIF, unregulated structures, such as single-investor funds (without the flexibility to admit further investors) and so-called investment clubs for which no capital has been raised are not covered by the VAT exemption.
This brings the German VAT situation into line with the legal situation in other EU Member States, such as Luxembourg, and eliminates a substantial competitive disadvantage for Germany as a fund jurisdiction.
Not only the services of the AIFM are covered as VAT-exempt “management”, but third-party services may also be VAT exempt if they represent “a largely independent whole of some importance” for the AIF. This applies in particular to the provision of individual recommendations for the acquisition and disposition of assets of an AIF, e.g. in the case of certain investment advisors.
For so-called net price agreements (“management fee plus VAT”), which are common in practice, the VAT that was previously payable in addition to the net management fee is no longer applicable, with a primarily positive effect for the AIF and its investors (lower management costs). Indirectly, this also has a positive effect on the so-called hurdle and thus on the carried interest of the initiators (lower capital effectively tied within the AIF). In the case of so-called gross price agreements (“management fee including VAT”), which are less common, the cost burden for the AIF remains the same.
Effects on practice
As a result of the VAT exemption of their own services, affected AIFMs and investment advisors will in the future lose their right to deduct input VAT (e.g. travel expenses, own consultancy costs, etc.). Existing fund and service agreements should be reviewed for price adjustment clauses that may have been agreed or for possible statutory compensation claims (e.g. Section 29 of the German VAT Act). In addition, existing rental agreements should be reviewed for clauses on contractual penalties or statutory compensation claims that may apply if and because rental properties are used for AIF management that will be VAT-exempt in the future. This can result in the loss of the property owner’s own right to deduct input VAT. For example, some rental agreements provide for contractual penalties for this input VAT damage. Affected AIFMs and investment advisors should review their rental agreements.
As the ZuFinG will only become effective as of 1 January 2024, the new law will have no effect on VAT treatment in prior years up to and including 2023.