New fund location law

In the draft of the “Fund Location Act” (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. It also implements European requirements from the directives for “Undertakings for Collective Investment in Transferable Securities” (UCITS) and for “Alternative Investment Fund Managers” (AIFM).

On the evening of April 22, 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 – German Investment Code), as revised by the FoStoG, provides four new product options:

I. Special AIFs may be established as closed-ended investment funds

According to the recommended resolution, closed-end special AIFs may also be issued as special assets in the future. This expands the product range of German fund managers and the regulations applicable to open-ended investment funds now also apply to closed-ended investment funds. The advantages of the closed-end investment fund compared to the previously applicable corporate form of the closed-end fund are obvious: For example, partnership agreements no longer need to be concluded, shareholder meetings/resolutions are no longer required, and limited partners do not need to be entered in the commercial register. In addition, the acquisition of shares in closed-end funds is simplified, as these – in contrast to a limited partnership interest in an investment limited partnership – can be deposited with a special fund.

The amendments enable German private equity and venture capital funds for the first time to use the legal form of a special fund instead of the corporate form of a GmbH & Co. KG, which was normally chosen in the past. This has always been known in other European jurisdictions such as Luxembourg with the Fonds Commun de Placement (FCP).

The advantages hoped for are flexibility and minimization of the risk of commercial infection of income or full or partial tax liability (shielding effect).

II. closed-end master-feeder AIF

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

III. open infrastructure special funds

The planned introduction of infrastructure special funds will give small investors the opportunity to invest in infrastructure project companies in order to participate in infrastructure projects. This idea is not alien 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. Under the amended KAGB, infrastructure project companies are companies established to rehabilitate, operate or manage facilities, plants or structures that serve the functioning of the community.

IV. Development Promotion Fund

In the FoStoG, the German Bundestag set up a regulatory framework for “development funds” (EF funds) as an initial incentive to launch more EF funds in the Federal Republic of Germany as well and to mobilize private capital for achieving the Sustainable Development Goals in developing and emerging countries. The EF funds may be issued as open-ended and closed-end domestic special AIFs and offer more flexibility compared to traditional German fund types. EF funds combine European-style sustainability funding with the opportunity to invest in developing countries through a dedicated fund vehicle.

In addition, the FoStoG contains the following further changes:

• The “Umsatzsteuergesetz” (VAT Act) is amended to extend the VAT exemption to the management of venture capital funds.
• In order to increase the attractiveness of employee share ownership, the “Income Tax Act” (EStG) raises the tax-free maximum amount from the current 360 euros to 1,440 euros (the draft still provided for an increase to 720 euros). In addition, a tax provision is included to further promote employee share ownership, particularly in start-up companies.
• Further reduction of bureaucracy for fund managers is to be achieved by, among other things, the fundamental abolition of the permanent data carrier, unless prescribed by European law, the abolition of numerous written form requirements and more flexibility for fund managers in the event of changes to investment principles (shortened amendment period).
• Further digitization of supervision: Communication with BaFin is to take place only electronically (from April 2023).
• Communication with BaFin is to be further digitized and generally conducted electronically (from April 2023).
• Regulations on pre-marketing of investment funds (directive implementation) are introduced (more on this below).

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

Particular attention should be paid to the inclusion of ESG information in the KAGB. According to the Disclosure Regulation, which already came into force on March 10, 2021, each KVG 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 KVG itself and for the funds it manages or launches. In addition, various disclosure requirements apply in the annual report, in the sales prospectus and on the company’s homepage.

Pre-Marketing

The so-called pre-marketing must be implemented in the member states by August 2, 2021 and is intended to harmonize sales regulations within the European Union. This is 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 being re-regulated that precedes the actual start of sales. The following activities (still) do not constitute pre-distribution:

• An investor approaches the KVG independently with a request to invest (so-called reverse solicitation);
• KVG merely presents its competence and product range in general;
• The KVG contacts investors with a fund that is ready for offering (as this already fulfills the (full) distribution term).

All other activities of the KVG in the run-up to the actual marketing of a special AIF may in future constitute pre-marketing. This must be checked on a case-by-case basis. KVGs are required to notify BaFin of the commencement of pre-marketing activities within two weeks.

Cryptocurrencies

According to the recommended resolution, crypto securities for open-ended domestic special funds with fixed investment conditions will be acquirable in the amount of up to 20 percent of the fund assets in the future. Thus, the gates are open for institutional crypto funds in Germany. The inclusion of crypto assets in special funds is an important step for their acceptance and strengthens Germany’s position as a financial investment location.

Conclusion

On the one hand, the Fund Status Act implements many of the fund industry’s demands for simplification, less bureaucracy and more flexibility, which is to be welcomed. On the other hand, new obstacles stand in the way of asset managers, such as the more difficult distribution of special AIFs, and the draft appears to some to be too short-sighted.

Critical voices consider the proposed legislative changes to be only manageable for Germany as a fund location. One of the criticisms of employee participation in start-ups is that it would be ineffective in its present legal form, as the new regulations are far removed from practice and thus not applicable to start-ups. There would also be inadmissible interference in the tax system.

With regard to the planned investments in crypto assets and/or infrastructure project companies, it should be clarified whether a permit extension by BaFin is required for this.Whether the measures will actually increase the attractiveness of the German fund location remains questionable. The bill needs only the approval of the Bundesrat before it is expected to enter into force on July 1, 2021, and will apply in part from April 1, 2023.