German Investment Tax Act for Alternative Investment Funds

by Dechert LLP
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The German Ministry of Finance published on 4 December 2012 a draft bill amending the German Investment Tax Act, which is the special German tax regime for German investors investing in German and foreign investment funds. This draft bill was approved (in a revised version) by the German Federal Cabinet in January 2013. On 22 March 2013 the German Bundesrat published its comments.

The amendment of the German Investment Tax Act is expected to become effective by 22 July 2013, i.e. the date upon which also the AIFM Directive is anticipated to be implemented into German law (see DechertOnPoint  "The German Implementing Act for the AIFM Directive: A Critical Survey of the Draft Bill").

Under the new Investment Tax Act, subject to certain grandfathering provisions, for any alternative investment fund (AIF) two new categories of fund structures will be introduced for German tax purposes: investment partnerships and investment corporations (whereas UCITS and similar open-end investment funds will be treated as so-called “investment funds”). In the context of the AIFM Directive under German fund regulatory rules, any investment fund which does not allow for redemption of funds units by its investors within one year will be treated as a so-called AIF.

Investment partnerships (Personen-Investitionsgesellschaften) will, for German tax purposes, be treated as tax transparent entities. German and foreign investment partnerships need to prepare and file a German partnership tax return if at least two German tax resident investors hold an interest in such investment partnership.

Investment corporations (Kapital-Investitionsgesellschaften) which include any German and non-German AIFs which are legally either structured as a corporation or in a contractual format (e.g. a Luxembourg FCP) will be treated for German tax purposes as separate taxable entities. In principle, German investors will therefore only be taxed upon any distributions made by such investment corporation.

To avoid investment corporations being used for tax deferral purposes (i.e. for structures in which income will be retained and re-invested at the level of the fund vehicle and therefore not be taxed at the level of German investors until distribution) the German Bundesrat suggested introducing a yearly minimum tax charge for such fund structures. This concept, which was included in the initial draft bill of the German Ministry of Finance (but has been removed in the draft bill by the German Federal Cabinet), would lead to an annual minimum taxable income of 6% of the year end NAV (or if higher 70% of the annual increase of the NAV).

This proposal, which is highly criticized by the German alternative investment fund industry, would create a penalty tax for German investors in such AIFs which do not provide for a regular annual distribution of at least 6% of its NAV, which would particularly affect investments in funds in the private equity and real estate industry structured in a corporate (or contractual) format (e.g. LUX SICAV or Irish PLC). Certain infrastructure funds, however, may be able to provide for such regular annual distributions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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