Location Promotion Act: New tax opportunities for special investment funds for alternative investments

Background

The Act on the Promotion of Private Investment and the Financial Location (Standortfördergesetz - StoFöG) was published in the Federal Law Gazette (BGBl. I 2026 No. 33) on 9 February 2026 and thus came into force. For institutional investors who frequently use or wish to use the German special investment fund (Section 3 InvStG) as a bundling vehicle, it brings significant legal relief in terms of tax investment conditions.

The new regulation: Section 26 no. 4 letter h InvStG

Until now, the participation of an open-ended domestic special AIF with fixed investment conditions (Section 284 KAGB) in alternative investment funds - in particular in closed-ended private equity, infrastructure, venture capital and loan funds in the legal form of a domestic or foreign partnership - was only possible within the scope of the so-called 10 % dirty limit of Section 26 InvStG (cf. TAXGATE Blog from 28.01.2021). In practice, this limit was often not a viable option, as the associated risks for the tax status of the special fund were considerable and were typically not accepted by investors.

§ Section 26 no. 4 letter h InvStG as amended (StoFöG): In future, open-ended domestic special AIFs with fixed investment conditions may in principle invest without restriction in all types of domestic or foreign (alternative) investment funds, in particular also in closed-end private equity, infrastructure, venture capital and loan funds.

The new regulation removes this obstacle for new investments. The German special investment fund is therefore likely to become considerably more important as a bundling and investment vehicle for institutional investors, such as insurance companies, pension schemes, savings banks and family offices, in the area of alternative investments in the future.

Consequences for institutional investors

The new regulation is particularly relevant for the following investor groups who, in the case of alternative investments via bundling vehicles, regularly want to ensure that - compared to direct investments - there is no tax disadvantage and that all tax declaration and cooperation obligations (tax compliance) can also be fulfilled in the case of indirect investments via a special fund:

• Savings banks and credit institutions: For regulated credit institutions that invest in private equity partnerships as direct investors, the special investment fund now offers an attractive bundling structure without having to forego the favourable tax status. It should be noted that the application of Section 8b KStG has changed compared to direct investment (see below).
• Pension schemes and pension funds: Institutional investors with tax-exempt status will increasingly be able to use the special investment fund as a common vehicle for alternative investment strategies in future, provided that the transparency options under Sections 30 and 33 InvStG are exercised appropriately and the tax information obligations of the target funds are ensured.
• Family Offices: For wealthy private investors and entrepreneurial families who have previously invested in alternative investment funds via direct holdings, the new regulation opens up the possibility of tax-optimised bundling, particularly for new investments in venture capital and private equity strategies.

In all cases, the new regulation is a further step towards enhancing Germany's standing as a fund location in international competition - an objective that the legislator is expressly pursuing with the StoFöG.

Key pitfalls in practice

Despite the welcome expansion of investment opportunities, three tax-related problem areas must be carefully considered in the actual implementation:

1. no tax-neutral contribution of existing shareholdings

The transfer of existing fund investments from an investor's direct portfolio to a special investment fund is not possible on a tax-neutral basis. Target fund investments with significant hidden reserves are therefore generally not eligible for such a transfer. The new regulation is therefore essentially effective for new acquisitions.

2. application of section 8b KStG only if the requirements of section 42 (3) InvStG are met

Unlike in the case of a direct investment - such as a non-life insurance policy directly in a private equity partnership (e.g. a PE SCS) - the corporation tax relief under Section 8b KStG only applies to indirect investments via the special investment fund (section 3) subject to the additional requirements of Section 42 (3) InvStG. There must be a sufficient prior income tax burden at the level of the target corporations and, if necessary, this must be proven. This proof requires a corresponding tax information policy on the part of the target fund, which is not a matter of course in all fund structures. This information can be negotiated via a side letter if necessary.

3. high proof requirements for AStG add-back taxation

Alternative investments (e.g. in international infrastructure projects) are frequently characterised by complex investment structures, often involving the use of (low-taxed) foreign holding companies. This means that at investor level Taxation of add-backs in accordance with the Foreign Tax Act (AStG) are applied. If the investor wishes to receive these amounts tax-free as part of subsequent distributions from the special investment fund, experience has shown that the requirements for proof are high in the case of indirect investment via the fund. In practice, this evidence can often not be provided in full and estimates within the meaning of Section 162 AO are necessary. § 162 AO are necessary. In the worst case scenario, this can lead to double taxation.

Conclusion and recommendation for action

The opening of the tax investment conditions for special investment funds through the StoFöG is a clear tax policy signal in favour of Germany as a fund location and offers institutional investors new structural design options. Nevertheless, the practical implementation requirements are considerable.

Before acquiring an investment in an alternative investment fund (target fund) via the special investment fund, we recommend reaching a binding agreement with the target fund and the respective capital management company (KVG) (typically within the framework of so-called side letter agreements) to ensure that all information required for tax purposes - in particular to obtain tax exemption in accordance with Section 8b KStG and to process any AStG add-back taxation - can be provided in full and promptly.

The TAXGATE team consists of experienced experts with many years of experience focussing on institutional investors. We are happy to support you in the tax review and structuring of AI investments via the special investment fund as well as in the coordination with target fund managers and KVGs. If you have any questions, please do not hesitate to contact us.