On 22 April 2021, the German Federal Parliament passed the Fund Location Act (Fondsstandortgesetz, hereafter FoStoG). The FoStoG aims to make the German regulatory framework for supervisory law and tax law more competitive and to implement conditions for the further digitalisation of supervision. Furthermore, the FoStoG aims to implement certain European regulations (adopted in the framework of the European Commission's Sustainable Finance Action Plan) on cross-border fund distribution, taxonomy and ESG information requirements for capital management companies.
The FoStoG amends numerous German laws, in particular, the German Investment Code (Kapitalanlagengesetzbuch, hereafter KAGB) and various tax laws (Investmentsteuergesetz (InvStG), Einkommensteuergesetz (EStG) and Umsatzsteuergesetz (UStG)). This client alert focuses on the essential regulations for capital management companies and their funds, as well as regulations concerning start-ups and SMEs. In terms of content, the FoStoG provides for the following changes:
- Introduction of new fund types – infrastructure funds and development promotion funds
In the case of public funds, the new infrastructure special fund (Infrastruktur-Sondervermögen) will be introduced. Closed-ended public alternative investment funds (AIFs) may invest in infrastructure project companies. In addition, exemptions from the consolidation obligation under accounting law will be included for closed-ended special funds that are issued as special AIFs. However, there will be no steering of private capital into infrastructure and sustainability investments.
The development promotion fund (Entwicklungsförderungsfonds) will also be introduced as a new special fund type. It will serve to promote sustainability and offer the possibility of investing in emerging markets with a special fund vehicle.
- Wider scope for action for (real estate) fund managers
- Expansion of the product range for fund managers
Under the FoStoG, fund managers will have more flexibility through new permissible investments, legal forms and structures for investment assets. For open-ended special AIFs, for example, the free capital limit for real estate financing will be increased from 50 per cent to 60 per cent. Fund managers will also be given more flexibility when structuring open-ended real estate funds in connection with real estate companies. Real estate funds will no longer have to comply with the previously applicable 50 per cent or 25 per cent limit when lending to real estate companies (which acquire or hold real estate) if the real estate fund holds 100 per cent of the capital and voting rights in the real estate company. It will also be possible for funds to make corresponding loans to real estate holding companies that do not immediately hold real estate.
The product range will also be expanded by the fund vehicle in the form of open-ended infrastructure funds, which will enable small investors to invest in infrastructure project companies (see above). In addition, it will be possible for portfolios to be expanded in particular through the approval of closed-ended master-feeder structures for closed-ended funds. In future, it will also be possible to acquire crypto assets for open-ended special funds with fixed investment conditions, up to a maximum of 20 per cent of the fund assets.
- Reduction of bureaucracy
The conception, management and accounting of open-ended and closed-ended funds will be simplified. Unless prescribed by EU law, the requirement for a durable medium to inform investors will be abolished. The same applies to numerous written form requirements. In future, it will also be possible to acquire all crypto stocks for open-ended special funds with fixed investment conditions, up to a maximum of 20 per cent of the fund assets.
- Introduction of pre-marketing of investment funds
Pre-marketing will be introduced – based on the Alternative Investment Fund Managers Directive – as a preliminary stage of fund distribution. This distribution in the regulatory sense of upstream activities will have to be notified within a two-week period. However, for a period of 18 months after the start of pre-marketing, a distribution event to professional or semi-professional investors will be deemed to have taken place upon subscription of units of the ‘pre-distributed’ special fund. Consequently, a distribution notice will be required on a regular basis.
- Introduction of revocation of cross-border distribution of investment funds
For EU and foreign funds, revocation provisions regarding distribution will be introduced.
- Start-ups and SMEs: Promoting employee capital through tax advantages
For employees of start-ups or venture capital and other small businesses, investing in shares in their company will become more attractive. The tax-free maximum amount for such equity investments will be raised from €360 per year to €1,440 per year from 1 July 2021. Also, free or discounted transfers of equity stakes in start-ups to employees are not to be taxed in principle initially, but only at the time of disposal; at the latest, however, after twelve years. Finally, the management of so-called ‘venture capital funds’ will be exempt from VAT.
- Entry into force
- Amendments to the KAGB for the digitalisation of supervision: 1 April 2023
- Other amendments to the KAGB and the InvStG: 2 August 2021
- Amendments to the EStG and UStG: 1 July 2021
The final bill of the FoStoG is available at: www.bundestag.de/.