• Henning Brockhaus, Partner |

Keyfacts

  • The Fund Location Act aims to improve the attractiveness of Germany as a fund location.

  • In addition to new product options, the revised Capital Investment Code also provides for measures to exempt funds from VAT, promote employee share ownership and reduce bureaucracy for fund managers.

  • The transparency rules of the Disclosure Regulation on dealing with sustainability risks will be integrated into the Capital Investment Code.

In the draft of the "Fondsstandortgesetz" (FoStoG), the legislator presents a whole series of measures to increase Germany's attractiveness as a fund location. New regulations are intended to increase the competitiveness of the German fund industry and reduce bureaucracy. In addition, European requirements from the directives for "Undertakings for Collective Investment in Transferable Securities" (UCITS) and for "Alternative Investment Fund Managers" (AIFM) will be implemented.

On the evening of 22 April 2021, the Bundestag gave final approval to the Federal Government's draft of the Fund Location Act in its second and third readings and passed it in the version of the Finance Committee's recommended resolution.

The "Kapitalanlagegesetzbuch" (KAGB) revised by the FoStoG provides four new product options:

1. Special AIFs may be launched as closed-ended investment funds

According to the recommended resolution, closed-ended special AIFs may in the future be launched also as special funds. This expands the product range of German fund managers, and the regulations applicable to open-ended investment funds will now also apply to closed-ended investment funds. The advantages of closed-ended special funds compared to the previously applicable corporate form of closed-ended funds are obvious: for example, partnership agreements no longer have to be concluded, shareholder meetings/resolutions are no longer required and limited partners do not have to be entered in the commercial register. In addition, the process of acquiring shares in closed-end funds is simplified, as these shares - unlike a limited partner's share in an investment limited partnership - can be deposited with a special fund. 

The innovations mean that German private equity and venture capital funds can for the first time use the legal form of a special fund instead of the corporate form of a GmbH & Co. KG. This has always been recognised in other European jurisdictions, such as Luxembourg with its Fonds Commun de Placement (FCP).

It is hoped that this will bring advantages such as flexibility and minimising the risk of commercial infection (tainting) of income or a complete or partial tax liability (shielding effect).

2. Closed-end master-feeder AIFs

The revised KAGB also contains new rules for closed-end master-feeder structures, which were previously not permitted. This change also serves to strengthen Germany as a fund location. Asset management companies are to be given more structuring options. The content of the regulations is largely based on the regulations for open-ended master-feeder structures (Sections 171 to 180), taking into account the special characteristics of closed-ended vehicles. However, closed-end funds cannot be subsequently converted into a feeder fund, as is possible for open-end funds.

3. Open-ended infrastructure special funds

The planned introduction of infrastructure special funds will give small investors the opportunity to invest in infrastructure project companies and have a share in infrastructure projects. The idea is not foreign to German investment law, as this type of fund already existed in the Investment Act of 2007. The regulations for open-ended infrastructure funds are based on the regulations for real estate funds. According to the amended KAGB, infrastructure project companies are companies founded to redevelop, operate or manage facilities, plants or structures that serve the functioning of the community.

4. Development support funds

In the FoStoG, the Bundestag has created an initial incentive for "development support funds" to be set up in the Federal Republic of Germany and to mobilise private capital to help achieve the Sustainable Development Goals (SDGs) in developing and emerging countries. The development support funds may be launched as open and closed-ended domestic special AIFs, and offer more flexibility than the traditional German fund types. The development support funds combine European-style sustainability funding with the opportunity to invest in developing countries through a special fund vehicle.

In addition, the FoStoG contains the following further changes:

  • The "Value Added Tax Act" (UStG) will be amended to extend the VAT exemption to the management of venture capital funds.
  • To increase the attractiveness of employee share ownership, the maximum tax-free amount in the "Income Tax Act" (EStG) will be raised from 360 euros to 1,440 euros (the draft had provided for an increase to 720 euros). In addition, a tax regulation to further support employee share ownership, especially in start-up companies, will be included.
  • Bureaucracy for fund managers is to be further reduced by (among other things) the general abolition of the permanent data carrier unless prescribed by European law, the abolition of numerous written form requirements, and more flexibility for fund managers regarding changes to investment principles (shortened amendment period).
  • Communication with BaFin is to be further digitised and generally to be carried out electronically (as from April) 
  • Regulations on the pre-marketing of investment funds (directive implementation) will be introduced (more on this below).

Anchoring the ESG information requirements according to the Disclosure Regulation in the KAGB

Special attention must be paid to the inclusion of ESG information in the KAGB. According to the Disclosure Regulation, which entered into force on 10 March 2021, every AMC must publish comprehensive information on how it deals with sustainability risks (e.g. how ESG criteria are integrated into investment decisions or whether a fund and the fund manager generally pursue ESG objectives). This information must be disclosed both for the AMC itself and for the funds it manages or launches. In addition, there are various disclosure obligations to observe in the annual report, in the prospectus and on the company's homepage.

Pre-marketing

“Pre-marketing” must be implemented in the member states by 2 August 2021 and is intended to harmonise marketing regulations within the European Union. Specifically, this relates to the "provision of information or communication about investment strategies or investment concepts [...] with the aim of determining the extent to which investors are interested in an AIF". This means that a broad field of activity is newly regulated - one which exists before marketing actually begins. The following activities (still) do not qualify as pre-marketing:

  • An investor independently approaches the AMC with a wish to invest (reverse solicitation);
  • The AMC merely presents its competence and product range in general;
  • The AMC contacts investors with a fund that is ready to be offered (as this already fulfils the (full) distribution term).

All other activities of the AMC in the run-up to the actual marketing of a special AIF could satisfy the criteria of pre-marketing in future. This must be examined on a case-by-case basis. AMCs are obliged to notify BaFin of the commencement of pre-marketing activities within two weeks.

Crypto stocks

According to the recommended resolution, crypto assets can in future be acquired for open domestic special funds with fixed investment conditions in the amount of up to 20 per cent of the fund assets. This opens the door for institutional crypto funds in Germany. By being included in special funds, crypto assets will take an important step in achieving acceptance, and this will strengthen Germany's position as a financial investment location.

Conclusion

On the one hand, the Fund Location Act implements many of the fund industry's demands for simplification, less bureaucracy and more flexibility, and this is to be welcomed. On the other hand, asset managers face new obstacles such as the greater difficulty in marketing special AIFs, while some in the industry feel that the draft does not go far enough. 

Critical voices consider the proposed legislative changes to be negligible for Germany as a fund location. Among other things, employee participation in start-ups has been criticised in that it would remain ineffective in its present legal form, as the new regulations are considered far removed from practice and thus not applicable to start-ups. Such criticism claims that there would also be inadmissible interference in the tax system.

With regard to the planned investments in crypto assets and/or infrastructure project companies, investors should clarify whether a licence extension from BaFin is required.

Whether the measures will actually increase the attractiveness of Germany as a fund location remains questionable. The draft law now only needs the approval of the Bundesrat (upper house of the German parliament) before it is expected to come into force on 1 July 2021 and (partly) apply from 1 April 2023.