The German Act on the Adaption of Investment Fund Taxation in Connection with the AIFM Directive (the "AIFM Tax Act") did not pass the legislative process prior to the Federal Election. Initially, it was envisaged that the AIFM Tax Act should enter into force on 22 July 2013.
The AIFM Tax Act failed due to a dissent regarding the so-called pension asset pooling.
Some States brought a new draft of the AIFM Tax Act to the Federal Council (Bundesrat). The Federal Council (Bundesrat) is to initiate a new legislative process. The new draft shall be classified as "urgent matter".
The new draft is substantially similar to the previous AIFM Tax Act that failed prior to the Federal Election. Below we summarized certain material points of the new draft:
1. Qualifying Investment Funds
The definition of the term "qualifying investment funds" is identical to the respective definition in the previous AIFM Tax Act (as drafted by the resolution of the German Bundestag on 16 May 2013). The criteria that have to be satisfied for a fund to qualify as "qualifying investment fund" have been inserted in the new draft without any changes, in particular:
- Only shares in companies qualify as eligible assets for "qualifying investment funds" (cf. our client info dated 31 January 2013).
- Other types of business participations such as interests in limited partnerships that will have been acquired prior to the future resolution of the German Bundestag on the new draft are subject to an unlimited grandfathering.
2. Non-Qualifying Investment Funds
The tax regime applicable to non-qualifying investment funds (both partnership-type and corporate-type) remains unaffected.
- Non-German asset pools of a contractual type such as Luxembourg FCPs, French FCPRs or an Italian Fondo Chiuso have to face a re-classification as opaque for German tax purposes. If they do not satisfy the criteria for qualifying investment funds (only investments in eligible assets cf. section 1 above) they will be treated as corporate-type non-qualifying investment funds.
- Until now the draft does not have a transitional rule, i.e. the re-classification would occur when the new act enters into force. Due to the current draft it is possible that this may happen at a given date during the calendar year (as opposed to year end).
- The very controversial mandatory lump-sum taxation for corporate-type non-qualifying investment funds is not part of the new draft.
3. Transitional Rules/Grandfathering
Under the new draft the provisions of the AIFM Tax Act shall enter into force after the Act was published in the Federal Bulletin. Thus, there is no retroactive entry into force as discussed in more detail in our client info dated 4. September 2013. Particular attention has to be paid on the following issues:
- The grandfathering rules for pre-existing regulated investment funds (within the scope of the German Investment Funds Act as in force on 21 July 2013) are also part of the new draft. However, the grandfathering period was not extended (due to the delay in the legislative process). Rather, the grandfathering period is still limited to the end of the business year ending after 22 July 2016. This means that pre-existing regulated investment funds have to comply with the criteria for qualifying investment funds (cf. section 1 above) as of 2016/2017.
- Although not expressly stated in its provisions, it seems to be the intention of the new draft that the grandfathering provisions shall also apply to pre-existing regulated investment funds that have been established after 21 July 2013 and prior to entering into force of the new AIFM Tax Act. We will address this issue during the legislative process with the objective to clarify the wording of the draft.
- There are no grandfathering or transitional rules planned for non-qualifying investment funds. Such funds would be subject to the new law as of its entry into force. It cannot be determined when the new law will enter into force. The best case would be to complete the legislative process until 1 January 2014. However, it is possible that the new AIFM Tax Act will enter into force on a given date during year 2014. This will have an impact on the re-classification of certain non-German vehicles for German tax purposes (cf. section 2 above).