[co-author: Klaus Hahne, National Tax Partner]
Special Investment Funds – Amendment of Fund Documentation before 30 June 2018
Special Investment Funds (Spezial-Investmentfonds) have to fulfill a set of statutory requirements so that the funds and their institutional investors can benefit from a semi-transparent taxation regime pursuant to §§ 25 et seq. of the German Investment Tax Act (“InvTA”). The applicable limitations for Special Investment Funds (e.g. limitation of the universe of eligible assets and the number and status of investors) have to be included in the relevant fund documents. However, the tax authorities have provided for a specific transition period until 30 June 2018 for such Investment Funds which have elected to apply for the semi-transparent tax status by self-declaration and actually fulfill the statutory requirements, but which have not amended their fund documentation accordingly (cf. circular of the German Ministry of Finance dated 21 September 2017, docket-number IV C 1 – S 1980-1/16/10010 :009).
Therefore, Special Investment Funds have to review and amend their constituting documents (for example their prospectus, offering documents and/or articles of association) to be compliant with the statutory requirements. Necessary amendments have to be implemented before July 2018, as otherwise the fund will be treated as a (tax intransparent) mutual fund and a subsequent change of the fund status is not provided for by law. Furthermore, a portfolio review before July 2018 would be advisable (please see as follows).
Special Investment Funds – Adjustment of Asset Portfolio before 30 June 2018
Special Investment Funds are obliged to invest at least 90% of their fund value in assets listed in the catalogue of eligible assets pursuant to § 26 no. 4 InvTA. However, the German Ministry of Finance (cf. circular dated 21 December 2017, docket-number IV C 1 – S 1980-1/16/10010 :016) has provided for a transition measure until 30 June 2018, which allows Special Investment Funds to hold assets that are not eligible according to the new statutory provisions (i.e. investments into target investment funds which are non-compliant with the requirements of § 26 no. 4 lit. h) InvTA). Such investments have to be sold before 1 July 2018 if their value (in total) exceeds the 10% threshold.
Investment Funds Targeting Eligibility for Investments by Special Investment Funds
In conjunction with the actions required under the preceding two sections, Investment Funds that pursue eligibility for investments by Special Investment Funds are also required, by the end of June 2018, to update their constituting documents in accordance with the requirements pursuant to § 26 no. 4 lit. h) InvTA. Furthermore, such Investment Funds should review their portfolios for eventually holding non-eligible assets and act to achieve compliance by the end of this month.
Tax-Privileged Investors Dedicated Investment Funds and Share Classes
Generally, an Investment Fund receiving specific German-source income (e.g. dividends from shares of German stock corporations and income from German-situs real estate) is subject to German (corporate) income tax with the respective income, unless the fund fulfills the requirements of a Special Investment Fund which has opted for a full-transparent taxation (Transparenzoption). However, no tax liability occurs if the relevant Investment Fund, sub fund or share class is open only for specific tax exempt investors pursuant to § 10 InvTA (tax-privileged investors). The terms and conditions of the Investment Fund, sub fund or share class, as the case may be, must contain respective investment restrictions.
According to the circular of the German Ministry of Finance dated 21 September 2017 (docket-number IV C 1 – S 1980-1/16/10010 :009), the tax authorities have provided for a specific transition period until 30 June 2018 for such fund vehicles, which actually fulfill the statutory requirements but have not amended their fund documentation accordingly. Such amendments have to be made before 30 June 2018 at the latest, to allow the respective fund vehicle to further benefit from a full tax exemption under German law.
Funds of funds (Dach-Investmentfonds) or respective sub-funds or share classes which can be purchased only by tax-privileged investors itself can be treated as tax-privileged investor of target funds (cf. circular of the German Ministry of Finance dated 21 September 2017, docket-number IV C 1 – S 1980-1/16/10010 :009). It can therefore transmit the tax-privileged status of its investors to the target funds. However, please note that the terms and conditions of such fund of funds have to be amended before 31 December 2018 according to the statutory requirements.
Calculation of Equity Investment Quota of Funds of Funds
Investment Funds which continuously invest at least 51% or 25% of their net asset value in specific equity instruments (Kapitalbeteiligungen pursuant to § 2 para. 8 InvTA) are treated respectively as equity funds (Aktienfonds) mixed funds (Mischfonds) for German investment tax purposes. German tax resident investors of equity or mixed funds benefit from a partial tax exemption of income received from their fund units.
In addition to exchange traded shares of stock corporations and non-exchange traded shares of taxable corporations, also investments of fund of funds in units of equity or mixed funds can be treated as equity investment to fulfil the statutory minimum equity investment requirements. Therefore, the fund of funds may recognize (i) the applicable statutory minimum equity investment quota (51% / 25%) of the target fund or (ii) the (higher) minimum equity investment quota as determined in the applicable terms and conditions of the target fund or (iii) the actual equity investment quota as determined and published by the target fund on an ongoing basis. However, until 30. June 2018 the tax authorities allowed fund of funds also to rely on a higher minimum equity investment quota of the target fund according to a self-declaration of a target fund, provided that such quota will be included in the applicable fund documents before July 2018 (cf. circular of the German Ministry of Finance dated 8 November 2017, docket-number IV C 1 – S 1980-1/16/10010 :010).
Similar rules and compliance deadlines apply for real estate investment funds (Immobilienfonds) pursuant to § 2 para. 9 InvTA.
However, please note that the tax authorities will not object to the status of an Investment Fund as equity or mixed fund for German tax purposes, if the fund actually falls below the minimum equity investment quota as determined in the applicable terms and conditions of the Investment Fund in 2018 (cf. circular of the German Ministry of Finance dated 21 December 2017, docket-number IV C 1 – S 1980-1/16/10010 :016).
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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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