The "Financing for the Future Act" - extension of the VAT exemption to all investment funds within the meaning of the German Capital Investment Code
The Act on the Financing of Future Investments (Financing for the Future Act) is set to come into force on 15 December 2023 and in part on 1 January 2024. With the approval of the Bundestag on 17 November 2023 and the Bundesrat on 24 November 2023, the most important hurdles in the legislative process were recently cleared. In general, the Financing for the Future Act is intended to strengthen Germany's attractiveness as a financial centre and at the same time promote digitalisation and climate protection. In particular, access to equity providers and the stock exchange for start-ups and high growth companies is also to be simplified. The package of measures also includes the extension of the VAT exemption for fund management to all alternative investment funds (AIFs).
The extension of the VAT exemption
The management of certain investment funds is exempt from VAT under Section 4 No. 8 lit. h of the German Value Added Tax Act (German VAT Act). This includes the management of undertakings for collective investment in transferable securities (UCITS) and comparable alternative investment funds (AIFs). The characteristic of comparability, which requires in particular that AIFs are in competition with UCITS, raises many questions and therefore leads to legal uncertainty. Essentially, only venture capital funds are currently covered by the regulation.
As of 1 January 2024, the criterion of comparability will be removed from the German VAT Act. All alternative investment funds, including private equity, venture capital, real estate, infrastructure and crypto funds, which were not previously covered, will now fall under the VAT exemption. This means that only the management of such investments, which do not qualify as alternative investment funds, will remain subject to VAT. Consequently, following the introduction of the Financing for the Future Act, investment clubs and single-investor funds in particular will still be subject to VAT.
The aim of the regulation is to create a level playing field for fund managers in comparison to the most important competitors in Luxembourg, France and the UK, which have been exempting the management of all funds from VAT for years, and thus ultimately to strengthen Germany's position as a business and financial centre.
Consequences of the VAT exemption for the management of investment funds
From 1 January 2024, the same rules will apply to alternative investment funds as to undertakings for collective investment in transferable securities. Consequently, all investment funds within the meaning of the German Capital Investment Code (KAGB) will then be exempt from VAT. When dealing with the term "management", operators of alternative investment funds can refer to the principles already developed by case law and the tax authorities in connection with the "management" of UCITS.
The Financing for the Future Act does not contain any transitional provisions. This means that the new regulation will apply directly from 1 January 2024 and there is no provision for retroactive effect.
No VAT on the management of investment funds
As management is now generally no longer subject to VAT, the capital management company (KVG) must invoice the management fee it charges without showing VAT. Care must be taken to ensure that only the net amount is invoiced. This invoice must include a reference to the tax exemption in accordance with Section 14 (4) sentence 1 no. 8 German VAT Act. If the capital management company nevertheless invoices VAT after 1 January 2024, it will be liable for this VAT due to the issue of an unauthorised tax statement in accordance with Section 14c (2) German VAT Act.
Loss of the right to deduct input tax
A further consequence of the VAT exemption is that input VAT deduction is excluded for input transactions in connection with the management of funds on the output side in accordance with Section 15 (2) sentence 1 no. 1 German VAT Act. In most cases, capital management companies do not provide any further (VAT-liable) output transactions, meaning that input VAT deduction is likely to be completely excluded. This leads to final costs on the part of the capital management company. This may also necessitate a (pro rata) adjustment of the input tax deduction in accordance with Section 15a German VAT Act for assets already acquired by the capital management company that are not only used once to carry out transactions, provided that their first use was not more than 5 years ago (10 years in the case of real estate).
Effects on commercial leases
The new regulation may also have an impact on any tenancy agreement for premises in which the capital management company carries out its activities. The corresponding contract should be checked immediately for information obligations, compensation obligations or rent increase clauses. The landlord of commercial premises has often opted for VAT liability for its letting activities in order to be entitled to deduct input tax. However, the effective exercise of this option is invalidated if the tenant does not carry out any activity subject to VAT. For this reason, commercial leases usually contain corresponding clauses to protect the landlord. It should be noted that such claims for damages or compensation, particularly in the case of new buildings, can exceed the VAT actually due on the rent many times over and therefore represent a considerable financial risk.
Key Takeaways
The Financing for the Future Act extends the scope of the VAT exemption to all investment funds within the meaning of the KAGB. The comparability of AIFs with UCITS is no longer required. This means that all capital management companies may no longer charge VAT for the management of investment funds, regardless of whether they are UCITS or AIFs.
In a mirror image, however, capital management companies will also lose their entitlement to deduct input tax for any input turnover in this context. This can also have an impact on assets that have already been purchased.
Furthermore, landlords of commercial premises should urgently review their existing rental agreements. The VAT exemption for capital management companies as tenants may result in tenants being liable for damages or rent increases, depending on the structure of the individual rental agreements. It must be checked in detail whether the respective rental agreement clause is covered by the amendments to the Financing for the Future Act and the clause has been effectively agreed overall. Only as a next step should capital management companies consider whether negotiations with the landlord are necessary, for example regarding a cancellation or adjustment of the rental agreement.
The Financing for the Future Act comes into force on 1 January 2024. As it does not contain any transitional provisions, swift action is now required.
DLA Piper's tax law team will be happy to answer any further questions you may have in this context.
