Germany: Amended VAT Exemption For Management Of Alternative Investment Funds (AIF) Effective As Of 1 January 2018

Last Updated: 9 November 2017
Article by Dr. Andreas Rodin and Dr. Peter Bujotzek

The German VAT provisions regarding the management of investment funds have been inadequate and subject to litigation for many years. In its latest decision concerning this matter dated 9 December 2015 (Case C-595/13; "Fiscale Eenheid"), the European Court of Justice ("ECJ") held that the management of real estate funds that are subject to specific State supervision fall within the scope of the VAT exemption under Union law. We reported on that decision in our Client Information dated 10 December 2015.

As of 1 January 2018, a new provision under the German VAT Act becomes effective with the purpose of implementing the ECJ's jurisprudence by "selectively extending" the scope of application of the relevant VAT exemption.

This Client Information summarizes the main details of the new provision under Sec. 4 No. 8 lit. h of the German VAT Act ("Sec. 4 no. 8 lit. h UStG (new version)") and the consequences in practice starting on 1 January 2018.

1. VAT Exemption for Management of AIFs Comparable to UCITS

According to Sec. 4 no. 8 lit. h German VAT Act (new version), the management of undertakings for collective investment in transferable securities ("UCITS") and of alternative investment funds ("AIF") comparable to UCITS is exempt from VAT.

The German legislature did not explicitly stipulate which types of AIF are "comparable" to UCITS and thus fall under the scope of application of Sec. 4 no. 8 lit. h German VAT Act (new version).

According to the explanatory memorandum, the following criteria must be met to find an AIF comparable to a UCITS:

  • a comparable specific State supervision;
  • the same group of investors;
  • the same competitive conditions;
  • issuance of units/shares to multiple investors;
  • dependence of the investment return on the performance of the investments made by the fund's manager ("AIFM") over the period during which the investors hold their shares/units;
  • the investors' entitlement to distributions of the Fund's profits and to profits resulting from an increase in value of the fund shares/units as well as the exposure to the investment risk; and
  • the investment of the funds raised in accordance with the principle of risk-spreading.

From what we hear, the fiscal authorities take the position that the VAT exemption shall apply only if all of the above criteria are met. This view is taken in a draft administrative pronouncement concerning the VAT exemption which, however, is still subject to further consultation.

2. Interpretation in line with EU Law

We are of the opinion that, according to Sec. 4 no. 8 lit. h German VAT Act (new version), the management of open-ended and closed-ended AIF should be exempt from VAT if (and because) the AIF itself and/or the AIFM (regulation of the manager) is subject to a "comparable specific State supervision".

The other criteria identified by the legislature for an AIF to be deemed comparable to a UCITS (see 1.) should be generally met, provided that the AIF or the AIFM is subject to specific State supervision. Moreover, we take the view that a separate review of these additional criteria beyond the requirement of a "comparable specific State supervision" is not permitted when interpreting Sec. 4 No. 8 lit. h German VAT Act (new version) in a manner consistent with the relevant EU law, in particular Art. 135 (1) lit. g of the European Directive on the VAT (VAT Directive) and the ECJ's jurisprudence.

In its decision "Fiscale Eenheid", the ECJ held that the applicability of the VAT exemption for the management of investment funds ("special investment funds" under EU law) depends, in essence, only on a comparable specific State supervision. In this respect the ECJ shared the view of the Advocate General who stated clearly that investment vehicles which are subject to a specific State supervision shall benefit from the VAT exemptions in the same way as UCITS.

3. AIF within the Scope of Application

Based on an interpretation of the new law according to which a "comparable specific State supervision" of the AIF and/or AIFM is decisive for the application of the VAT exemption, there are in our view good arguments that the management of every AIF is exempt from VAT pursuant to Sec. 4 No. 8 lit. h German VAT Act (new version), provided that such AIFs' managers (AIFM):

  • are subject to (full) supervision pursuant to the German Capital Investment Act ("KAGB");
  • are registered in accordance with Regulation (EU) No. 345/2013 on European venture capital funds with EEA relevance (EuVEC-VO) or Regulation (EU) No. 346/2013 on European social entrepreneurship funds Text with EEA relevance (EuSEF-VO); or
  • are registered in accordance with Sec. 2 para. (4) or para. (5) KAGB (so-called "small" Special-AIFMs).

Each of the aforementioned managers is subject to certain minimum regulations in respect of its structure and operation as well as certain information publication requirements for purposes of the respective authorization or registration. In consequence, these managers are each subject to a "specific State supervision" within the meaning of the VAT exemption.

4. Conclusion and Recommendation

Beginning on 1 January 2018, the management of an AIF by one of the categories of AIFM mentioned above (see 3.) should be exempt from VAT. Thus the AIFM should be permitted to declare proceeds from the management of the respective AIF without VAT in its VAT returns.

Given the remaining legal uncertainty, we would regard it as prudent to explain the precise procedure to the competent tax authorities and/or coordinate with the competent tax authorities beforehand.

For further information on the revisions of Sec. 4 No. 8 lit. h German VAT Act (new version) as well as on the procedural implementation of the VAT exemption in an individual case, please do not hesitate to contact the authors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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