VAT exemption for fund managers at last

With the so-called Future Finan­cing Act (ZuFinG), the German govern­ment is once again attemp­ting to streng­then Germany as an invest­ment and fund loca­tion. There is no doubt that funds domic­i­led in Germany will suffer nume­rous other signi­fi­cant compe­ti­tive disad­van­ta­ges in inter­na­tio­nal compa­ri­son in addi­tion to the VAT burden on manage­ment fees that has exis­ted in many cases to date.

Initi­ally, the Fede­ral Cabi­net on August 16, 2023, deci­ded to intro­duce the ZuFinG to finance future-proof invest­ments, and the Bundes­tag passed a reso­lu­tion on Novem­ber 17, 2023 — after extre­mely diffi­cult nego­tia­ti­ons — gave its appr­oval to the ZuFinG and the VAT exemp­tion it conta­ins for all alter­na­tive invest­ment funds (AIFs). After the Fede­ral Coun­cil also appro­ved the ZuFinG on Novem­ber 24, 2023, the manage­ment of all AIFs, i.e. all private equity and venture capi­tal funds as well as credit, real estate, infra­struc­ture and all types of funds of funds, will also be exempt from VAT under German tax law from Janu­ary 1, 2024.

For the AIF, the elimi­na­tion of the VAT charge elimi­na­tes a cost item at fund level. As a result, the investa­ble capi­tal of the respec­tive AIF increa­ses, which is ulti­m­ately advan­ta­ge­ous for the AIF and its inves­tors and at the same time increa­ses the avai­la­bi­lity of venture capital.

Howe­ver, the capi­tal manage­ment compa­nies (KVGs) must now also examine their respec­tive struc­tures for possi­ble conse­quen­ces, as this change in the legal situa­tion has an impact on the input tax deduc­tion of the KVG and this can, for exam­ple, have a nega­tive effect on the tax liabi­lity of the KVG. possi­bly trig­ger correc­tions to exis­ting rental agree­ments, etc.

The ZuFinG will enter into force with effect from Janu­ary 1, 2024 once it has been published in the Fede­ral Law Gazette. This means that after more than 15 years, the VAT exemp­tion for manage­ment services for all AIFs, which was deman­ded and hoped for by the indus­try and indus­try repre­sen­ta­ti­ves, has been intro­du­ced, after the German legis­la­tor had initi­ally only permit­ted VAT exemp­tion for the manage­ment of under­ta­kings for coll­ec­tive invest­ment in trans­fera­ble secu­ri­ties, then also for AIFs compa­ra­ble to these and finally also for venture capi­tal funds.

One could take the view: after all. At the same time, one could also be plea­sed that the ZuFinG was passed promptly and without further rest­ric­tions with regard to the VAT exemp­tion for the admi­nis­tra­tion of all AIVs, which we had also wished for but hardly dared to hope for (see also FYB Finan­cial Year­book 2024 p. 27f and 33f).

Of course, the only down­side is that it will take the German legis­la­tor more than 15 years to (finally) imple­ment a compre­hen­sive VAT exemp­tion for the manage­ment of AIVs and thus only after this time will the legal situa­tion in other EU member states be harmo­ni­zed and the exis­ting loca­tio­nal and compe­ti­tive disad­van­ta­ges for German fund struc­tures elimi­na­ted, at least in this respect. — In the mean­time, howe­ver, many AIFs and their mana­gers have alre­ady turned their backs on Germany and have adopted newer struc­tures, e.g. the German AIFs. in a VAT-exempt foreign coun­try. I fear that it will not be easy to bring these struc­tures back into Germany, espe­ci­ally in view of the fact that the VAT exemp­tion for admi­nis­tra­tive services in connec­tion with AIFs has now been codi­fied in law, but this will not change the other long-stan­ding tax issues.

The almost 3 deca­des is actually true. In our latest article in the FYB Finan­cial Year­Book 2024 “Is private equity the devil’s play­thing?”, we reviewed the various ques­ti­ons and issues that have arisen over the more than 27 years in which we have been deal­ing with the diverse topics surroun­ding tax compli­ance for private equity funds and their (German) share­hol­ders. — And indeed, there are nume­rous compe­ti­tive disad­van­ta­ges for fund struc­tures in Germany, which are caused by a lack of or unfort­u­nate legal regu­la­ti­ons or are brought about by profi­s­cal as well as unsys­te­ma­tic and some­ti­mes inap­pro­priate appli­ca­tion and inter­pre­ta­tion of legal frame­work condi­ti­ons and/or admi­nis­tra­tive directives.

The return of capi­tal contri­bu­ti­ons by EU and third-coun­try corpo­ra­ti­ons remains a pres­sing issue. This should — as in prin­ci­ple be tax-neutral ever­y­where in the world — inclu­ding in Germany. Howe­ver, this tax neutra­lity can only be achie­ved in Germany if the foreign EU or non-EU capi­tal company repay­ing the capi­tal submits to a cumber­some appli­ca­tion proce­dure and then also provi­des exten­sive support­ing docu­ments and evidence, which in prac­tice are diffi­cult to obtain due to the German inves­tors’ limi­ted influence in the foreign struc­ture or, for exam­ple, the fact that the German inves­tors have little influence in the foreign struc­ture. cannot gene­rally be provi­ded at all in the case of fund-of-funds struc­tures. We have alre­ady addres­sed this topic seve­ral times in the various issues of the FYB Finan­cial Year­Book in recent years. Our sugges­tion in this regard is simple: clear out this unwieldy regu­la­tion and process it on the basis of the approach outlined by the BFH, i.e. away from formal requi­re­ments and broad accep­tance of all conceiva­ble evidence that iden­ti­fies and substan­tia­tes such payments as (taxa­ble) profit distri­bu­ti­ons or even (tax-neutral) return of capi­tal contributions.

For the other syste­ma­tic and dogma­tic (simpli­fi­ca­tion) propo­sals, such as I refer to the new FYB 2024 edition and the refe­ren­ces to previous editi­ons of the FYB for the treat­ment of carried inte­rest as a pure profit share for asset-mana­ging fund struc­tures, no legal retroac­ti­vity for legal chan­ges such as the capi­ta­liza­tion of fund estab­lish­ment costs or our progres­sive idea of aboli­shing the distinc­tion between private asset manage­ment and commer­cia­lity for private equity funds.

If, follo­wing the reco­gni­tion and codi­fi­ca­tion of VAT exemp­tion for the manage­ment of AIFs, legis­la­tors and tax autho­ri­ties also show courage in the other open issues and demons­trate a willing­ness to change for a future syste­ma­tic and dogma­tic approach, Germany could indeed be streng­the­ned as a fund loca­tion and the finan­cing of future-proof invest­ments could be achieved.

Dr. Chris­toph Ludwig

has been a part­ner at BLL since 1998 and specia­li­zes in the ongo­ing manage­ment of natio­nal and inter­na­tio­nal private equity and venture capi­tal funds and in provi­ding compre­hen­sive advice to wealthy (private) indi­vi­du­als with an entre­pre­neu­rial back­ground. The range of services in the private equity sector includes the prepa­ra­tion of annual finan­cial state­ments and tax returns for dome­stic struc­tures as well as compre­hen­sive and complex sepa­rate and uniform decla­ra­ti­ons for dome­stic share­hol­ders of foreign private equity companies. 
Equity funds inclu­ding any AStG declarations.