Last week the German Federal Ministry of Finance (BMF) submitted the ministerial draft of a German Act on the Adaption of Investment Fund Taxation in Connection with the AIFM Directive ("Draft") to the associations of the investment industry. The Draft provides for significant changes of the taxation of funds and their investors. The proposed provisions of the Draft would have a significant impact on existing structures.
The Draft provides for the taxation of investment undertakings regulated by the draft of the German act on implementation of the AIFM directive (KABG-E). The Federal Ministry of Finance, however, does not intend to implement a single tax regime for all such investment undertakings but creates categories of funds solely for tax purposes which are to be subject to different tax regimes.
German and non-German private equity funds and other closed-end funds such as mezzanine, infrastructure and real estate funds are to be treated as "non-qualifying investment funds". For tax purposes differentiation is made between partnerships and corporations.
The general rules of taxation are to remain applicable to partnerships (e.g. German GmbH & Co. KG, limited partnerships), i.e. there are no changes to the taxation rules currently in force. German and non-German corporations (e.g. German limited liability corporation or joint stock corporation, Luxembourg S.C.A./S.A. SICAV, Irish PLC) are to be subject to a new tax regime comparable to the lump-sum taxation (!) under the current German Investment Tax Act. However, a taxation of the actually received income, e.g. due to the reporting of certain tax information or similar measures, is not possible. 2. Open-End Funds
Generally, there will be no changes to the tax regime for open-end funds that fall within the scope of the German Investment Tax Act currently in force. However, certain requirements will be introduced in order for a fund to qualify for this tax regime (e.g. certain redemption rights and investment limitations). Accordingly, open-end funds that do not fulfill these requirements will be subject to the tax regime applicable to closed-end funds.
The draft does not contain transitional provisions for closed-end funds organized as partnerships (e.g. German GmbH & Co. KG, limited partnerships) because their taxation does not change.
The new tax rules for closed-end funds organized as corporations (e.g. German joint stock corporation, Luxembourg S.C.A./S.A. SICAV, Irish PLC) will enter into force as of 22 July 2013; they are not not be grandfathered. Such funds would be subject to mandatory lump-sum taxation.
The tax regime currently in place for open-end funds that fall within the scope of the German Investment Tax Act currently in force and that have been or will be established prior to 22 July 2013 remains applicable; they are grandfathered.
VAT on Management Fee
Management Fees paid by closed-end funds are intended to remain subject to VAT.
The provisions (including the lack of grandfathering rules) for closed-end funds organized as corporations are not reasonable and constitute a violation of the constitution. In the course of the hearing of the relevant associations and in the legislative procedure P+P will use professional efforts to adapt the provisions of the Draft appropriately.
Scope of the Draft
In the course of the regulatory implementation of the AIFM Directive, the scope of the new investment law pursuant to the German Investment Code (Kapitalanlagegesetzbuch) will be extended to all alternative investment funds ("AIF"), including private equity funds and other closed-end funds. Under the Draft, the new system is implemented in German tax law. However, for tax purposes various categories of AIFs will be introduced that differ from the classification under the German Investment Code and that are subject to different tax regimes.
Qualifying Investment Funds
The term "Qualifying Investment Fund" includes the European harmonized undertakings for collective investment in transferable...