Health-Check private label funds - grandfathering for old investment funds extended until 31 December 2017

Under the current legal situation, investment fund investors benefit from tax privileges. In particular, funds launched before the introduction of the flat-rate withholding tax (from 2009) can provide investors with permanent tax-free capital gains from investments. It is important here that the fund consistently qualifies as an "investment fund" within the meaning of the InvStG. InvStG and does not fall outside the scope of the InvStG, as this would result in the permanent loss of privileged taxation for this fund vehicle. In this context, it should be noted that the question of which vehicle qualifies as an investment fund within the meaning of the InvStG must be answered in the individual cases. InvStG has changed several times in recent years and investors are generally forced to adapt their fund vehicles due to changes in investment conditions and investment activities in order to avoid jeopardising privileged fund taxation. The details are as follows:

• Until the end of 2008, any vehicle that invested in (more than three) qualifying assets in accordance with the principle of risk diversification qualified as an "investment fund".
• BaFin letter 14/2008 (WA) dated 22 December 2008 and the BMF letter dated 18 August 2009 (InvSt decree) made certain investment limits relevant for qualification as an investment fund. For example, compliance with a 20% maximum limit for investments in equity interests was decisive for qualification as an investment fund. Point 297 of the InvSt decree granted the funds a transitional arrangement to adapt their investment conditions to the new legal situation. This transitional provision ("2008 Grandfathering") has been extended several times, most recently until the end of the financial year ending after 22 July 2016 (InvSt decree in the version of the BMF letter dated 22 May 2014).
• When the AIFM Tax Adjustment Act came into force on 24 December 2013, the requirements for an investment fund to qualify as a privileged investment fund were further tightened (compliance with the investment conditions of section 1 (1b) sentence 2 InvStG). Here too, the legislator has granted the funds a transitional arrangement ("2013 Grandfathering") in order to adapt the investment conditions to the new restrictive requirements. Pursuant to section 22(2) sentence 1 InvStG, investment funds launched before 21 July 2013 continue to be considered investment funds until the end of the financial year ending after 22 July 2016, even without fulfilling the catalogue of requirements pursuant to section 1(1b) sentence 2.

Both the 2008 grandfathering and the 2013 grandfathering would therefore expire in the short term (in 2016 or 2017, depending on the financial year). In the meantime, however, the legislator has already initiated the next reform of the InvStG, which will involve a complete system change (cf. TAXGATE News from 25/02/2016, TAXGATE Blog from 22/01/2016). The new investment fund taxation is to be applied from 2018 (essentially without transitional provisions). According to section 22 (2) sentence 1 InvStG-E, the 2013 Grandfathering be extended until the new InvStG comes into force. If grandfathering were not extended, the investment funds concerned would have to make extensive changes to their investment conditions and asset holdings in 2016 or 2017, which may then no longer be necessary due to the change in the taxation regime on 1 January 2018. In order to avoid unnecessary administrative effort on the part of investment funds, the previous transitional regulation is therefore to be extended until 31 December 2017. In a letter from the Federal Ministry of Finance dated 7 April 2016, the tax authorities also recently amended the 2008 Grandfathering extended until 31 December 2017, which is very welcome.

ConclusionFor existing fund structures, the extension of the transitional provisions means that there is no acute need for action in terms of adjusting the investment conditions. Nonetheless, investors and funds should analyse the future taxation of investment funds promptly in order to be able to adapt investment structures in good time. Your TAXGATE team has analysed the effects of the reform for corporate and private investors in detail and will be happy to answer any questions you may have in this regard. See also Elser/Thiede, Der Referentenentwurf zur Reform der Investmentbesteuerung (InvStRefG) - Analyse der Auswirkungen für private und institutionellen Investoren, in: NWB Erben + Vermögen issue 02/2016, p. 51; Elser, Corporate Asset Management after the Investment Tax Reform, CORPORATE FINANCE, Issue 5/2016.

Dr Thomas Elser is a tax consultant at TAXGATE in Stuttgart, a tax law firm specialising in transactions, investments and tax compliance.