The new Funds Location Act (Fondsstandortge-setz; „FoG“) – extensions on the product range and effects on tax law
On 20 January 2021, the Federal Government adopted the draft of the Fund Location Act ("FoG") (0051-21.pdf (bundestag.de). In terms of investment law, an expansion of the product range permitted under the KAGB is envisaged in particular, but the tax law implications are also the focus of interest. We have summarised the most important points for you.
Special assets as a new form for special AIFs
In future, closed-ended special AIFs may also be launched as special assets (section 139 sentence 2 KAGB-E). According to the current legal situation, only an investment stock corporation with fixed capital or an investment limited partnership is possible. However, the investment stock corporation with fixed capital is not practicable, among other things because the less flexible provisions of the German Stock Corporation Act (AktG) apply (section 140 (1) sentence 2 KAGB). The closed-end investment limited partnership can be structured flexibly in terms of company and investment law. Depending on the downstream structure, however, it can present fund initiators and investors with tax challenges (possible trade tax risk at fund level and infection risk for tax-exempt investors). For this reason, among others, German fund vehicles were often preferred to their Luxembourg counterparts (e.g. SA/SCA SICAV, SCS/SCSp) in the past.
The structure as a special fund should exclude the risk of a commercial infection of their income or a complete or partial tax liability (shielding effect) for the tax-exempt investors. However, there may still be a trade tax liability at the level of the investment fund, which - in deviation from the general rules - is based on the existence or non-existence of active entrepreneurial management pursuant to § 15 InvStG.
Open-ended infrastructure fund as a new product for mutual funds
In the area of open-ended mutual funds, a new fund vehicle for small investors to invest in infrastructure projects is to be introduced in the form of the infrastructure special fund (Sections 260a et seq. KAGB-E). These funds are to be allowed to invest in infrastructure project companies as well as in real estate, securities, money market instruments, bank deposits and money market funds, subject to certain investment limits. Investors must be allowed to redeem their units at least once a year and at most once every six months.
According to the newly created definition, an infrastructure project company is a company that was founded according to the articles of association or the statutes in order to construct, renovate, operate or manage facilities, plants, buildings or parts thereof that serve the functioning of the community (§ 1 para. 19 no. 23a KAGB). Compared to the PPP project company, this definition is broader, as no cooperation between the public sector and the private sector is required. Under certain circumstances, there may be overlaps with the real estate company (§§ 1 para. 19 no. 22, 235 KAGB). On the other hand, investments in assets that are not real estate (e.g. networks) are also permitted. Furthermore, the assets may also be managed by the infrastructure project company.
In future, infrastructure project companies are to be included in the catalogue of assets that can be acquired for special AIFs with fixed investment conditions as defined in § 284 KAGB and the tax law. 284 KAGB as well as the tax-related investment catalogue of special investment funds within the meaning of § 26 InvStG. § Section 26 InvStG (so-called Chapter 3 funds).
According to the newly created definition, an infrastructure project company is a company that was founded according to the articles of association or the articles of incorporation in order to construct, refurbish, operate or manage facilities, plants, buildings or parts thereof that serve the functioning of the community (§ 1 para. 19 no. 23a KAGB). Compared to the PPP project company, this definition is broader, as no cooperation between the public sector and the private sector is required. Under certain circumstances, there may be overlaps with the real estate company (§§ 1 para. 19 no. 22, 235 KAGB). To a greater extent than with real estate companies, these may also be managed. The latter in particular would only have been possible under the current law with the tax consequence that the special investment fund would in principle have lost its trade tax exemption. Already for real estate companies, the financial administration had taken a differentiated view in its investment tax decree as to the conditions under which the trade tax exemption is not granted. However, since the definition of an infrastructure project company is not limited to the acquisition of certain objects, the principles developed for real estate companies should not be applicable to the trade tax exemption.
Clarification of the financing of real estate funds
Under current law, it was not clear whether the company-related 50% limit and the fund-related 25% limit of Section 240 (2) KAGB also apply if the real estate investment fund holds a 100% interest in the real estate company to be financed. With such a participation amount, however, there is no difference in terms of risk between the participation and the real estate itself. These considerations have probably moved the legislator to clarify that the limits in question are not applicable in this case. By way of restriction, this should only apply to directly held real estate companies, i.e. not in the case of holding company structures. Furthermore, the limits are to be observed again if the shareholding falls below 100%.
In addition, the permissible load limit (section 284 (2) no. 3 KAGB-E) as well as the permissible borrowing limit (section 284 (4) sentence 2 KAGB-E) for real estate special funds is raised from 50% to 60% in each case and thus brought into line with the borrowing limit for real estate funds under the Investment Ordinance (section 2 (1) no. 14 letter c) AnlV; in this regard BaFin circular 11/2017 (VA) of 12 December 2017, section B.4.10 f)). A corresponding adjustment will also be made to the tax borrowing limit for special real estate investment funds (section 26 no. 7 sentence 2 InvStG).
Admission of closed-end master-feeder structures
Up to now, master-feeder structures were only possible for open-ended investment funds in accordance with the provisions of Sections 171 to 180 KAGB. With §§ 272a to 272h KAGB-E, this is now also to be made possible for closed-end funds in accordance with these regulations.
Tax relief for employee share ownership
The new § 19a EStG is intended to promote employee shareholdings in start-up companies by taxing the non-cash benefit from the granting of the employee shareholding only at a later point in time (see below). In principle, this is to avoid that the granting of the participation leads to a tax payment without liquid funds having accrued to the employee (so-called dry income tax).
However, deferred taxation is only granted if, among other things, the following conditions are met:
- The employee participation must be granted in addition to the salary owed anyway (i.e. in particular no deferred compensation).
- The employee participation must be covered by the wage tax deduction procedure and may only take place with the employee's consent. A subsequent deferral of taxation within the framework of the income tax assessment is excluded.
- The employer's enterprise must be a micro, small or medium-sized enterprise (SME) (i.e. less than 250 employees, turnover max. EUR 50 million, balance sheet total max. EUR 43 million) and its foundation must not date back more than ten years.
Taxation then begins at the time when (i) the shareholding is transferred for a consideration or free of charge or incorporated into business assets or (ii) the employment relationship with the employer ends, (iii) at the latest, however, after ten years have elapsed since it was granted.
When determining the pecuniary advantage, the tax-free allowance pursuant to § 3 no. 39 EStG may be deducted under the conditions stated therein. The allowance is to be raised from EUR 360 to EUR 720 p.a.. If the value of the shareholding falls below the original value by the time of taxation, only the reduced value is to be used as a basis for determining the pecuniary advantage (except, for example, in the case of distribution-related reductions in value).
In principle, the new regulation does not change the taxation of the pecuniary advantage as wages according to the standard tax rate. However, the rate reduction for extraordinary income according to Section 34 (1) EStG (so-called five-percent regulation) is applied under the conditions stated therein, if at least three years have passed since the granting of the employee participation. Employees are therefore well advised to take into account possible tax rate effects (e.g. as a result of increases in income or losses from other income) when claiming deferred taxation and with a view to later taxation. It should be noted, however, that up to now the new regulation has had no influence on social security and therefore the pecuniary advantage from the granting of employee participation is directly subject to the obligation to pay contributions without a time delay.
VAT exemption for the management of venture capital funds
The VAT exemption for fund management services pursuant to § 4 no. 8 letter h) UStG is to be extended to the management of venture capital funds.
According to the understanding of the tax authorities, a tax exemption was only possible for investment funds that are comparable to a UCITS. When this is the case is determined by a catalogue of criteria drawn up by the tax authorities (section 4.8.13, paragraph 8 UStAE). In practice, however, only special AIFs benefited from the tax exemption if they fulfilled the requirements of § 284 KAGB. With the envisaged statutory applicability of the VAT exemption to the management of venture capital funds, however, the question arises as to whether the view hitherto held by the tax authorities can continue to apply from the point of view of equal treatment. Moreover, the scope of application of the regulation is not clear due to the lack of a definition of the term venture capital fund. Here, on the one hand, reference could be made to the explanatory memorandum to the Act on the Promotion of Venture Capital 2004, which would in any case also include private equity and venture capital funds (Bundestag printed paper 15/3336, 1), on the other hand, reference could also be made to the venture capital fund as defined in § 2 (6) KAGB. On the other hand, it would also be possible to refer to venture capital funds as defined in § 2 (6) KAGB, which would restrict the scope of application somewhat.
Investment law advice by Schalast
We will be pleased to advise you on all questions regarding the effects of the new Fund Location Act as well as on investment and tax law issues in general.