While the BMF had already commented in detail on application issues relating to mutual investment funds (see for example TAXGATE blog from 14/06/2017)Further statements from the tax authorities on special investment funds were delayed or individual topics were addressed sporadically (see TAXGATE News from 28.12.2017). They were published on 20 January 2021 in great detail and with some clarifying statements on known questions of interpretation (Letter of application to the Investment Tax Act in the version applicable from 1 January 2018 (InvStG) dated 20 January 2021, IV C 1 - S 1980-1/19/10008 :011; amendment to the BMF letter dated 21 May 2019). In the following, selected questions of interpretation are discussed which deserve increased attention in fund practice in order to avoid serious disadvantages.

Compliance with the tax investment conditions: The central provision for qualification as a special investment fund is Section 26 InvStG. This standard lists purely tax-related investment provisions and, in particular, a catalogue of permissible investments for a special investment fund. This is ultimately linked to the application of the substantive taxation consequences, which are of great importance for the investment vehicles and their investors, some of which continue to be privileged (modified fund privilege for reinvested income, application of double taxation agreements; for details, please see the following. Thiede, Use of special investment funds as investment and bundling vehicles for family offices, in: NWB-EV 7/2020, p. 233 ff).

Boundary violations: In order to fulfil the legal requirements, permanent compliance with and monitoring of the investment regulations is one of the fund manager's tasks that should not be neglected and should ideally be carried out as part of dynamic fund compliance. This is because no material breach of the investment regulations may be detected. The legal consequences would be fatal, as the fund would lose its special status with serious tax disadvantages under Section 52 InvStG: The fund is deemed to have been dissolved for tax purposes with complete realisation of the hidden reserves.

Here, the application decree has set out the guidelines in the sense of a graduated and appropriate test sequence and expressly describes when a material breach of the investment regulations is deemed to have occurred. not should be present. The fund manager is not required to follow a completely rigid corset, but rather various criteria should be taken into account as part of an overall assessment:

  • Degree of fault of the administrator (Intention "aby mistake")
  • Duration of the offence (short-term = few days over a longer period = several months)
  • Value of the infringement in relation to the fund assets
  • Extent of the administrator's efforts to remedy the breach

Clear statement from the BMF: "In view of the far-reaching consequences [...] a material breach should only be assumed in exceptional cases as a last resort. As a rule, [...] the opportunity to remedy the infringement must be given."

In addition Passive boundary violations do not normally constitute a material breach of the investment regulations if immediate and reasonable countermeasures are taken. In the case of active border violations a blind eye is also turned to short-term repatriation.

However, these regulations do not give rise to overly lax handling. Rather, the application regulations of the Federal Ministry of Finance should be implemented, continuously monitored and documented in the fund compliance or tax compliance management system. This is essential for fund management, if only because consequences under criminal tax law cannot be ruled out and, moreover, claims for losses incurred by investors are to be expected. This recommendation also applies to compliance with the prescribed Risk mixAccording to the letter of application, non-objection rules should apply in particular in special phases and in the context of reorganisations or similar. Here, too, the letter is very useful as a kind of checklist for such phases and events in order to keep the corresponding documentation available for subsequent fund audits. Particular attention should therefore also be paid to compliance with the so-called "compliance checklist". Dirt limit (holding of unauthorised assets in accordance with the investment regulations of up to 10% of the fund assets); in contrast to the interpretations described above, tougher action is taken in cases of doubt (point 26.21: in the case of deliberate and planned investment in unauthorised assets above the 10% limit, a complaint is unavoidable).

Acquisition of private equity funds by specialised investment funds: The question of whether and under what conditions alternative investments, which often take the form of commercial foreign partnerships, can be realised has been discussed for some time, may be held harmlessly in special investment fundsdepends in particular on the specific structure of the target fund. The categorisation of such funds as AIFs does not preclude their acquisition as securities, corporations or real estate companies, for example, according to the administrative opinion. It is also to be welcomed that the tax authorities now at least also permit the acquisition of commercial partnerships within the scope of the 10% dirt limit. In addition, in the case of asset-managing and only commercially "characterised" target funds, it is possible to look through to the investments held by the target fund with regard to the investment limits.

Transparency option: In addition to the interpretation of Section 26 InvStG, the BMF's application decree comments on other legal issues; in particular, there was a great need for clarification in practice in connection with the Transparency option in accordance with § 30 InvStG (see Thiedeibid. p. 235). As expected, the BMF has confirmed that an exercised transparency option must be exercised uniformly for all investors in the fund (para. 30.6) and cannot be revoked (exception in para. 30.4: Not objectionable for options exercised before 20 January 2021 for the financial year beginning after 31 December 2020).

Further clarifications concern, among other things

  • Limited application of section 8b KStG and section 3 no. 40 EStG, especially for life and health insurance companies as well as credit and financial services institutions and financial companies,
  • Multi-level fund structures
  • Distributed income and distribution sequence
  • Calculation examples for tax deduction etc.

Overall, the application letter is a comprehensive and in part very detailed working aid for the implementation of the InvStG and creates significantly more legal certainty in some areas, both for the central qualification standard of section 26 InvStG and for the ongoing accounting and balance sheet mapping of complex investment strategies of institutional investors.

It is in the nature of things that certain questions remain unanswered and the corresponding further development of the law cannot be finalised, as undefined terms also appear in the application letter (e.g. the question of reasonableness to eliminate passive border violations). In contrast to other areas of law, the BMF does not appear to be inclined towards more stringent interpretations of the InvStG and the endeavours to achieve an understanding relationship between investors and the tax authorities is very welcome, not only in terms of implementation based on the overall tax system but also with regard to the politically desired enhancement of Germany as a fund location.

The TAXGATE Investment Team consists of experienced experts who will support you with sophisticated structuring as well as with further questions of interpretation on individual legal and tax issues with their focus on institutional investors.