Tax Alert. Adjustment of the German fund tax rules. December Contents

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1 December 2012 Tax Alert. Adjustment of the German fund tax rules to the AIFMD On 4 December 2012 the German Federal Ministry of Finance (Bundesfinanzministerium) has released a draft bill to align the German Investment Tax Act (Investmentsteuergesetz GITA ) to the AIFM Implementation Act (AIFM-Steuer-Anpassungsgesetz or,aifm-stanpg ). The Draft AIFM- StAnpG with its amendments to the German Investment Tax Act (in the following: GITA-D ) will have a significant impact on German investors investing in regulated and unregulated investment structures. The legislator intends to significantly extend the scope of application of the German fund tax rules. This will affect in particular alternative investment funds which in future will be governed to a larger extent by the fund tax rules. The future application of the fund tax rules to these structures will however not mean that the current transparent fund taxation will be applied. In contrast, to the majority of alternative investment funds which are structured as corporations a new taxation regime leading to taxable phantom income will be introduced. The regime will be similar to the currently existing penalty taxation of so-called black funds. Its application can however not be avoided by complying with reporting and publication requirements. Contents 1 Background Domestic implementation of the AIFM-Directive New concept of the German fund tax rules Further amendments First application Material impact of the GITA-D on existing investment structures Conclusion Contacts In the following, we describe the intended amendments and their anticipated impacts for German investors and (international) funds with German investors. 1 Background Domestic implementation of the AIFM-Directive The AIFM-Directive will be implemented in Germany by the AIFM Implementation Act (draft bill for an act to implement the Directive 2011/61/EC on Alternative Investment Fund Managers dated 30 October 2012). The draft AIFM Implementation act provides for the integration of the entire regulatory law on capital investments in one single code, the Capital Investment Code (Kapitalanlagegesetzbuch CIC ). The CIC will comprise also the regulatory rules on investment funds, which are at present provided for in the German Investment Act (Invesmentgesetz GIA ). Extension of the domestic regulation by the CIC The scope of the entities and their managers subject to regulation will be considerably extended by the CIC. In addition to Undertakings for AIFM Tax Adaption Act Issue 12/2012 1

2 the Collective Investment in Transferable Securities (EUrichtlinienkonformen Organismen für gemeinschaftliche Anlagen in Wertpapiere UCITS-Funds ), all domestic and foreign Alternative Investment Funds ( AIF ) will be dealt with by the CIC. This is the consequence of the broad definition of an AIF pursuant to Sec. 1 para. 3 in connection with para. 1 CIC, according to which > every undertaking for collective investments qualifies as an AIF that > collects funds from a certain number of investors > in order to invest these funds according to a pre-defined investment strategy > for the benefit of these investors and > that does not qualify as an operational company outside the financial sector and > that does not qualify as UCITS-Fund. Contrary to the previous definition of a fund, a risk diversified investment is not required for an entity to qualify as an AIF. The above definition of an AIF results in a substantial extension of the domestic regulation because all investment funds within the meaning of Sec. 1 para. 1 CIC to the extent they are not already classified as UCITS-Funds will qualify as AIF. As a result, a multitude of domestic and foreign fund vehicles and their managers will become subject to the regulations of the CIC. Given that the CIC extends the fund regulation significantly, also the scope of application of the German fund rules needs to be reshaped. The tax legislator has to determine which domestic and foreign funds shall be covered by the special regime of the German tax fund rules and which vehicles shall continue to be taxed under general tax provisions. In the present draft bill, the BMF introduces a new concept for the scope of application of the German tax fund rules and, based thereon, the taxation regimes to be applied to the individual case. In addition, the draft bill deals with the tax treatment of the openended investment partnership (offene Investmentkommanditgesellschaft Open-ended Investment KG ) that will be introduced by the CIC as mainly for the purpose of a pension asset pooling vehicle. Finally, the draft bill contains various amendments to the GITA to counteract certain undesired tax planning structures. AIFM Tax Adaption Act Issue 12/2012 2

3 2 New concept of the German fund tax rules 2.1 Current concept of the GITA At present, the special regime of the GITA applies only to a quite limited number of funds. For domestic investments, a taxation pursuant to the GITA is only applicable to investments in domestic funds, which are regulated under the GIA (public funds, special funds, investment corporations) and subject to supervision by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht BaFin ), and which grant their investors a redemption right. To investments of German investors in foreign investment structures, the GITA applies only if the foreign vehicle (i) invests according to the principle of risk diversification and, thus, qualifies as foreign investment fund and (ii) is either subject to investment supervision or grants its investors a redemption right. No application of the GITA for typical AIF On that basis, typical AIF-structures (e.g., private equity, mezzanine, timber, private equity real estate and infrastructure funds) where the investor has no redemption right for his units and which are not subject to investment supervision, do not qualify as foreign investment funds. Consequently, the GITA is not applicable in such cases. In addition, according to the authorities view (see BaFin circular 14/2008 and Investment Tax Decree 2009) foreign investment vehicles are not regarded as investment funds either, if certain investment restrictions or limits (e.g., 20% limit for participations in businesses) are breached. Therefore, e.g. alternative investments made via Luxembourg SICAV structures are usually not subject to the special regime of the GITA. In summary, typical AIF are currently not subject to the GITA and are therefore taxed according to the general tax provisions. Applying a so-called comparison of legal types approach (Rechtstypenvergleich), the AIF will currently be treated as a tax transparent partnership or a tax opaque corporation for German tax purposes. However, in the latter case the investor might in certain cases still be taxed on phantom income under the German CFC rules contained in the German Foreign Tax Act (Außensteuergesetz GFTA ). 2.2 Two taxation regimes under the GITA-D Investment funds versus investment companies According to Sec. 1 para. 1 GITA-D, the new German fund rules are generally applicable to all UCITS-Funds and AIF. Pursuant to Sec. 1 para. 1 GITA-D, however, a distinction is drawn between so-called investment funds and so-called investment companies, which are subject to significantly different taxation regimes. UCITS-Funds and AIF that meet all prerequisites of Sec. 1 para. 1a GITA-D qualify as investment funds. In contrast, AIF that fail only one of these prerequisites are investment companies. Distinction between investment funds and investment companies In view of the prerequisites of Sec. 1 para. 1a GITA-D the qualification of an AIF as investment fund will rather be the exception than AIFM Tax Adaption Act Issue 12/2012 3

4 the rule. The prerequisites, which must be met cumulatively, are as follows: > The AIF is subject to investment supervision in its country of incorporation; > Investors are entitled to redeem their shares in the entity at least once a year; > The business purpose of the AIF is limited to passive asset administration as opposed to an active entrepreneurial management of the assets or an entrepreneurial influence on the portfolio companies; > The assets of the AIF are invested according to the principle of risk diversification. Generally, a risk diversified investment is given if the AIF invests in more than three assets with different investment risk exposure; > A maximum of 20% of the AIF s value is being invested in participations in corporations. In addition, a maximum of 5% of the AIF s value may be invested in participations in the same corporation and the capital ownership percentage must stay below 10% of the corporation s capital. Furthermore, real estate funds may only invest up to 49% of the investment fund s value in real estate companies; in that context the 20%/5%/10% limits in relation to participation corporations do however not apply; > The leverage at fund level may only consist of short-term borrowing and may only be up to 30% of the investment fund s value. Real estate investment funds may take out short-term loans of up to 10% of the investment fund s value and, in relation to all other cases, may take out loans of up to 30% of the fair market value of the real estate held by the investment fund; > Investment is restricted to the following assets (cf. also Sec. 252 para. 2 no. 2 CIA): securities, money market instruments, derivatives, deposits, rights equivalent to real property and comparable rights under foreign law, real estate companies, shares or participations in domestic investment funds, EU-investment funds as well as foreign investment funds, precious metals, non-securitised loan receivables and participations to the extent the fair market value of such participations can be determined; > The investment strategy must be evident from the terms and conditions or the articles of association of the AIF. In summary, the prerequisites of Sec. 1 para. 1a GITA-D are geared to the regulatory provisions for open-ended domestic special AIF with defined investment terms (cf. Sec. 252 CIC), supplemented by investment restrictions and provisions for UCITS (cf. Secs. 202 para. 1, 206 para. 1 CIC). AIFM Tax Adaption Act Issue 12/2012 4

5 2.3 Taxation under the GITA-D New lump sum taxation In essence, the taxation of investment funds under the GITA-D corresponds to the transparent taxation under the current German tax fund rules, provided certain reporting and publication requirements are being complied with. Distributions and so called deemed distributed income are taxed according to the principle of transparency with the result that investors are generally taxed as if they held the assets of the investment fund directly. The high hurdle for the qualification of AIF as investment funds under Sec. 1 para. 1a GITA-D (see above), however, will mean that the effectively transparent taxation will be applied in much fewer cases. In particular, investors in closedend AIF will no longer benefit from the transparent taxation because such funds will not need the cumulative prerequisites of investment supervision of the entity and a redemption right in relation to the fund units. Taxation of investment funds on the basis of the current investment tax principle of transparency Unlike under the current legal framework, however, this does not result in an application of the general tax provisions to such funds. Rather, those AIF which do not fulfil the prerequisites of Sec. 1 para. 1a GITA-D are as investment companies subject to the new taxation regime under Secs. 18 and 19 GITA-D. In this context a distinction is to be drawn between so-called partnership-like investment companies (Personen-Investitionsgesellschaften) and corporationlike investment companies (Kapital-Investitionsgesellschaften). > Partnership-like investment companies For investment companies in the legal form of an investment partnership (,Investment KG ) or a comparable foreign legal form (e.g. private equity funds structured as limited partnerships) a uniform and separate declaration of profits has to be filed according to Sec. 18 GITA-D in connection with Sec. 180 para. 1 no. 2 of the German General Fiscal Code (Abgabenordnung GGFC ). In the hands of the investors, their corresponding profit share determined by said declaration of profits is subject to the general tax provisions. Also the taxation at the level of the entity (including German trade tax) corresponds to the general taxation principles. This means in particular that foreign business partnerships with a German permanent establishment are subject to trade tax. Taxation at investor and fund level according to the general tax provisions In summary, the taxation of partnership-like investment companies will not change significantly should the GITA-D be enacted as currently drafted. It corresponds to the current practice that foreign investment structures, to which the current investment fund rules do not apply are taxed according to the general tax provisions. In particular, in relation to investments in foreign partnerships also at present a uniform and separate declaration of profits has to be filed if at least two German taxpayers hold an interest in the foreign vehicle. In this respect, AIFM Tax Adaption Act Issue 12/2012 5

6 the only material change resulting from the GITA-D in our view is that a separate declaration of profits has to be filed even if there is just one German partner in a foreign partnership-like investment company. > Corporation-like investment companies Severe changes are contemplated regarding the taxation of investors in corporation-like investment companies: Taxation of corporation-like investment companies: According to Sec. 19 para. 1 GITA-D, corporation-like investment companies are defined as (i) German investment corporations (Investmentaktiengesellschaft,Investment AG ) and comparable foreign legal forms, (ii) German contractual funds/separate estates (Sondervermögen) as well as (iii) foreign AIF in the legal form of separate estates or a comparable foreign legal form, which do not meet the prerequisites of Sec. 1 para. 1a GITA-D for investment fund qualification. All these vehicles qualify as taxpayers within the meaning of the German Corporate Income Tax Act (Körperschaftsteuergesetz CITA ) and of the German Trade Tax Act (Gewerbesteuergesetz GTTA ). They are therefore taxed in accordance with the general tax provisions. Foreign contractual funds not meeting requirements of investment fund qualification will become taxpayers It is in particular noteworthy that the qualification of German contractual fund/separate estates as corporate taxpayers (cf. Sec. 11 para. 1 GITA) will be extended by the GITA-D to foreign contractual funds/separate estates or legally comparable foreign vehicles that do not meet the prerequisites of investment funds: For inbound investments this means that a foreign contractual fund (e.g. a Luxembourg FCP) not qualifying as investment fund will become subject to German corporate income tax with German source income (e.g. rental income and capital gains from German real estate). Further, also outbound structures might be affected because foreign contractual funds might no longer be transparent for treaty purposes if one applied the German point of view also in this context. To the contrary, for domestic or foreign contractual funds that fulfil the preconditions of Sec. 1 para. 1a GITA-D or are grandfathered there should be no change to the tax treatment (see para. 4 below). Taxation of the investor: For the investors a new taxation regime providing for phantom income will be introduced, which will be similar to the currently existing penalty taxation of socalled black funds (cf. Sec. 6 GITA). Unlike the penalty taxation, the taxation of phantom income at investors level ( Lump Sum Taxation ) can however not be avoided by complying with certain reporting and publication requirements in the future (cf. Sec. 19 para. 2 sent. 1 GITA-D). AIFM Tax Adaption Act Issue 12/2012 6

7 (i) Ongoing taxation: In addition to distributions, under the Lump Sum Taxation either (i) 70% of the annual value increase of the fund units (determined by reference to redemption prices or, in absence of available redemption prices, by reference to market prices or fair values) or (ii) at least 6% of the value of the fund units (determined similarly) is taxed as phantom income in the hands of the investors. In essence, the legislator assumes a minimum yield of 6% p.a. which is always taxable at investor level. The distributions and the phantom income are however not always fully taxable. If the investor provides evidence that the corporation-like investment company is subject to a general corporation tax at a rate of at least 15% in its state of residence, without being exempted from tax, such income will benefit from the 40% tax exemption for business investors according to Sec. 3 no. 40 of the German Income Tax Act (Einkommensteuergesetz ITA ) and from the 95% tax exemption for corporate investors pursuant to Sec. 8b CITA. In relation to private individual investors, the distributions and the phantom income should be subject to the flat tax regime (Abgeltungsteuer) at a combined rate of %. The legislator might have some justification for assessing phantom income in certain cases of accumulating corporationlike investment companies. The legislator expressly states in the explanations to the GITA-D for introducing the Lump Sum Taxation that the German CFC rules will likely not apply based on ECJ case law (in particular Cadbury Schweppes) and the subsequent amendments made to German law (cf. Sec. 8 para. 2 GFTA) in order to comply with such rulings. In our view, however, the Lump Sum Taxation per se and in particular its amount is inappropriate and excessive. This is due to the fact that it is applied mandatorily and the taxpayer unlike under the penalty taxation for black funds has no chance to avoid its application other than simply refraining from investing in the structure at all, which represents the most far reaching encroachment upon the investor s freedom. Moreover, the Lump Sum Taxation contradicts general tax law principles such as that income shall only be taxed once realised and/or received (Realisations- und Zuflussprinzip) as it provides for the taxation of mere phantom income. Finally, it may not only face constitutional, but also EU-law objections. In particular alternative investments via Luxembourg SICAV, which do not meet the prerequisites of Sec. 1 para. 1a GITA-D, will be affected by the introduction of the new German fund tax rules. Such funds would qualify as corporation-like investment companies in future with the consequence that their investors would suffer the Lump Sum Taxation described above. AIFM Tax Adaption Act Issue 12/2012 7

8 (ii) Taxation of capital gains: In addition, the gains from redemption or a disposal of units in a corporation-like investment company are taxable for the investors. Again, the 40%/95% tax exemptions of Sec. 3 no. 40 ITA and Sec. 8b CITA are only applicable to such gains if the fund is subject to corporation tax at a rate of at least 15% without being exempted from it and the investor substantiates that fact. For private individual investors the flat tax should apply. To avoid and effective double taxation of phantom income and capital gain, the gains from fund units shall be reduced by the amount of phantom income taxable for the investor in relation to his investment period; the investor must provide evidence on the amount of taxable phantom income. In many cases this reduction of the capital gain by the phantom income will effectively result in a capital loss. The net present value disadvantage from the ongoing taxation of phantom income will however not even be compensated if such capital losses are deductible and there is effectively tax capacity. > Unclear criteria for comparing foreign corporation-like investment companies According to the GITA-D, investors in foreign investment companies are subject to the Lump Sum Taxation if such companies are comparable to a German Investment AG. It is unclear whether the criteria to be applied in context of that test are tight or wide, i.e. whether a foreign vehicle must be virtually identical to a German Investment AG or only similar (e.g. set-up as any kind of corporation). Treatment of foreign limited liability companies unclear This question will in particular be relevant for the tax treatment of foreign limited liability companies, which are comparable to a German GmbH but not necessarily to a German Investment AG. In our view, it should be clarified that for these foreign companies the general taxation provisions but not the Lump Sum Taxation shall apply. However, the further developments within the legislative process remain to be seen. There is the risk that the legislator will apply the Lump Sum Taxation also to investment companies in the legal form of foreign limited liability companies. This would negatively impact investments of German investors in common foreign investment structures set up in a corporate format, which due to the broad definition of an AIF (see para. 1 above) could become subject to the Lump Sum Taxation. AIFM Tax Adaption Act Issue 12/2012 8

9 2.4 Overview on taxation regimes under the GITA-D Investment Structure Yes UCITS-Funds No AIF within the meaning of the CIC No Yes Prerequisites of Sec. 1 para. 1a GITA-D fulfilled Yes No Investment Fund Investment Company Corporation-like Investment Company Partnership-like Investment Company Taxation at fund level Investment fund taxation, i.e. transparent taxation with German investment funds being tax exempt Taxation under general tax rules, i.e. CITA and GTTA for German funds German source taxation for foreign funds, and Foreign taxation for foreign funds, if applicable Taxation under general tax rules, i.e. CITA and/or GTTA for German funds, as the case may be German source taxation for foreign funds, as the case may be and Foreign taxation for foreign funds, if applicable Taxation at investor level Investment fund taxation, i.e. taxation as income from capital investment subject to certain reporting and publication requirements being met Taxation of distributions and phantom income under Lump Sum Taxation (minimum 6% p.a.). Application of 40%/95% tax exemption, if fund is taxed at a rate at least 15% Taxation under general tax rules depending on the nature of investment (equity vs. debt) and the legal form of the entity/vehicle 3 Further amendments 3.1 Tax treatment of the open-ended Investment KG With the Investment KG, the legislator introduces a pension asset pooling vehicle in Germany which is meant to facilitate the central management of the assets of pension schemes in particular for internationally operating companies. The currently available fund types contractual fund/separate estate and Investment AG qualify as separate taxpayers, which makes them opaque for treaty purposes (i.e. they are considered persons for treaty purposes, which however are not resident in Germany due to their tax exempt nature). As a consequence, withholding tax levied abroad cannot be recovered by German contractual funds/separate assets and Investment AGs, as would have been the case for a direct investment of a pension fund. Therefore, the currently available German types of funds are not suitable for international pension pooling. Treatment of Investment KG as transparent vehicle for tax purposes AIFM Tax Adaption Act Issue 12/2012 9

10 This issue is aimed to be dealt with by the introduction of the Investment KG as a new type of fund, which shall be transparent for tax purposes based on its nature as partnership. The taxation of an open-ended Investment KG is provided for in Sec. 15a GITA-D. Pursuant to said provision, the taxation regime for German so-called special funds contained in Sec. 15 GITA shall apply accordingly, provided the prerequisites for investment fund qualification under Sec. 1 para. 1a GITA-D are met. Moreover, the sole holding of an interest in an open-ended Investment KG does not result in a permanent establishment or in a (pro rata) attribution of a permanent establishment to the partner. Again, this rule is aimed to facilitate in particular the investment of international group companies in such open-ended Investment KGs. 3.2 Measures to counteract bond stripping The GITA-D also contains a provision to counteract bond stripping in funds that has already been put forward by the German Federal Council (Bundesrat) during the legislative process for the Annual Tax Act Bond stripping has been used in funds to accelerate profits, e.g. in order to utilise tax losses at investor level. The new rule provides for a split of the acquisition costs between the principal only and interest only elements, at the time the bonds are split. As a consequence, a subsequent sale of the interest only element will no longer result in a significant gain nor will the sale of the principal only element result in a corresponding significant loss; the profit impact at fund and investor level will be limited to the actual accruals on the bonds/elements. Therefore bond stripping via funds will no longer be suitable for refreshing losses. 3.3 Amendment to the deductibility of income-related expenses Further, the GITA-D provides for an amendment of the rules on deductibility of income-related expenses at fund level pursuant to Sec. 3 para. 3 GITA. The amendments are aimed to prevent the allocation of such expenses to such profits that can be retained tax-free at fund level. 4 First application Generally, the German fund tax rules in the version of the GITA-D shall be applied as from 22 July By way of exemption, however, investment structures which already now are encompassed by the German fund rules, will continue to be governed by the currently existing rules, even if they fail the qualification of an investment fund under the new rules to be introduced by the GITA-D. This effectively means that structures which are at present investment funds should be grandfathered. On the contrary, for investment structures, which are currently outside of the scope of the German fund tax rules but which will fall under the GITA-D, there will be no grandfathering. In case such struc- AIFM Tax Adaption Act Issue 12/

11 tures qualify as corporation-like investment companies, the Lump Sum Taxation shall be applied as from 22 July The new rules on bond stripping at fund level shall be applied for the first time on splits of bonds into principal only and interest only elements after the date of the second and third reading in the German Federal Parliament (Bundestag). Finally, the new rules on the deductibility of income-related expenses shall be applied for the first time in relation to fund business years starting after 31 December Material impact of the GITA-D on existing investment structures 5.1 Need for restructuring investments of taxable investors in corporation-like investment companies Should the GITA-D be enacted as currently drafted, investments of German taxpayers in corporation-like investment companies have to be reviewed as to whether they should be restructured. This in particular holds true for investments in Luxembourg SICAV-structures (at least in the legal form of SA, SCA and depending on the question on the comparability with a German Investment AG, see 2.3 above also in the legal for of a S.à r.l.) as well as SICAR-structures, which are commonly used by institutional investors. Some of these structures do currently not qualify as investment funds under the German fund tax rules and are consequently subject to the general tax provisions only. Under the GITA-D to those structures the Lump Sum Taxation will be applied as from 22 July To avoid the Lump Sum Taxation, institutional, but also private individual investors may want to invest via tax-transparent partnership structures in the future. Existing investments which in the future will be trapped by the Lump Sum Taxation might be restructured. For German tax-exempt investors, the investment via opaque corporations was widely used in the past since a participation in a corporation shields from a so-called trade of business infection (gewerbliche Infektion; i.e. the tax-exempt status could be jeopardised). In relation to such investors and investments, the amendments provided for in the GITA-D should not have and impact and hence not require any action since tax exempt investors should also be tax exempt from the Lump Sum Taxation. 5.2 Impact on investments in contractual funds (FCP, FCPR) qualifying as corporation-like investment companies in future The future qualification of contractual funds as taxpayers for German corporate income and trade tax purposes has multiple consequences in relation to the investments of such vehicles as well as for their investors, namely: > Inbound investments by foreign contractual funds need to be reviewed as to whether they will attract German corporate in- AIFM Tax Adaption Act Issue 12/

12 come tax and potentially withholding tax for such funds (e.g. in particular in relation to investments in German real estate or participations in German corporations). > In relation to the investor level going forward it has to be analysed whether the Lump Sum Taxation will become applicable. Should this be the case the investments might need to be restructured. This especially applies with regard to taxable investors. > Finally, potential impacts on the application of treaties need to be considered. In particular, cases where the use of taxtransparent investment vehicles (e.g., Luxembourg FCP) permitted a look-through to the ultimate German investor from the point of view of a target jurisdiction (as should be the case with the United States), should be reviewed. This is because it can be questioned whether such look-through still applies with regard to contractual funds, which will qualify as corporate taxpayers under the GITA-D. 5.3 German investors in private equity funds In general, foreign private equity funds that are commonly structured as limited partnerships and their German investors should not be impacted by the new German tax fund rules to be introduced by the GITA-D. Such funds should qualify as partnership-like investment companies for which a transparent tax treatment will continue to be applicable. Therefore, the German investors will continue to be taxed on their profit share in the private equity fund on an ongoing basis. It should, however, be reviewed whether any entity within the fund structure at a lower tier level might qualify as an AIF and corporatelike investment company and therefore attract the Lump Sum Taxation. After 22 July 2013 master fund and feeder fund structures for alternative investments in the form of an Investment AG or a contractual fund will generally be acceptable to German tax-exempt investors since they will not be negatively impacted by the Lump Sum Taxation. 5.4 Setting up of investment funds under current legislation In future, there will be higher hurdles for a vehicle to qualify as an investment fund within the terms of Sec. 1 para. 1a GITA-D. At present it for such qualification it is sufficient that the vehicle invests in a risk diversified fashion, is either subject to investment supervision or grants a redemption right, and adheres to certain investment restrictions or limits (e.g., 20% limit for participations in businesses). Should the GITA-D be enacted as currently drafted, the criteria of,investment supervision and,redemption right need to be fulfilled cumulatively to qualify as investment fund, the investment restrictions and limits will be tightened and leverage restrictions will be intro- AIFM Tax Adaption Act Issue 12/

13 duced. Against this background, it could be recommendable, in particular for private individual investors, to invest e.g. in a Luxembourg FCP-SIF before 22 July 2013 in order to benefit from the grandfathering. 5.5 Review as to whether AIF qualification can be avoided Going forward, initiators/sponsors of investment structures should analyse whether an AIF qualification under Sec. 1 para. 3 GITA-D in connection with para. 1 CIC can be avoided. Leeways to escape AIF qualification might be found in the definition of AIF itself (see 1 above), like e.g. the prerequisites of a number of investors or the non-exercise of operational activities, or by relying inter alia on the exceptions for holding companies and securitisation special purpose vehicles from the AIFMD and the CIC (cf. Sec. 2 para. 1 no. 1 and 7 CIC). 5.6 Impact on special purpose vehicles issuing securities The question whether AIF qualification can be avoided will have particular importance for special purpose vehicles ( SPV ) issuing securities. At present, such SPVs typically already fail the qualification as an investment fund in absence of a risk diversified portfolio. Under the broad definition of AIF which does not presuppose risk diversification, this line of defence does no longer exist. Typical securitisations, however, will benefit from the exception for securitisation special purpose vehicles, and hence, not fall within the new German fund rules. On the contrary, it is currently unclear whether and to which extent this exception is applicable to other investment structures where not units but securities are issued to the investors. It might well be the case that the so-called certificate exception (Zertifikateausnahme) might still be available under the CIC and the new German fund rules. 6 Conclusion With the reform of the German fund rules on the horizon, a thorough and careful analysis as to whether investing into an investment structure will trigger the special German fund rules or the German general tax provisions only, is becoming even more important. As a rule of thumb, the German fund tax rules will in future apply more frequently than is the case today. This however does not mean that the transparent fund taxation regime will apply to the structures which will be governed by the German tax fund rules for the first time. Rather these structures will trigger the new and detrimental Lump Sum Taxation regime, which will generally not be acceptable to investors. It is unclear whether the legislator (or the administration) will cut back the scope of application of the Lump Sum Taxation during the further legislative process. Should this not be the case, existing investment structures might need to be restructured and future investments will AIFM Tax Adaption Act Issue 12/

14 have to be set up in such a way that they do not trigger the Lump Sum Taxation. The AIF definition itself might give leeway to escape from the German fund tax rules and hence also the Lump Sum Taxation. * * * AIFM Tax Adaption Act Issue 12/

15 Contacts Contacts For further information please contact: Dr. Sebastian Benz Partner (+49) Prof. Dr. Jens Blumenberg Partner (+49) Dr. Thomas Elser Partner (+49) Florian Lechner Partner (+49) Oliver Rosenberg Partner (+49) Andreas Schaflitzl Partner (+49) Authors: Dr. Thomas Elser, Dr.Rainer Stadler This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2012 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. Dr. Rainer Stadler Partner (+49) rainer.stadler@linklaters.com Prinzregentenplatz München Postfach München Telefon (+49) Telefax (+49) Linklaters.com AIFM Tax Adaption Act Issue 12/