Loan funds are in demand because under Solvency II, invest­ments in debt funds are trea­ted as “debt invest­ments” due to the look-through approach, and thus the capi­tal adequacy requi­re­ments are more favorable than for equity invest­ments, depen­ding on the design of the under­ly­ing debt instru­ments. In addi­tion, the invest­ment ordi­nance to which pension funds and pension funds are subject has also been opened up to invest­ments in loan funds. Finally, there is a prac­ti­cal aspect: In the current low-inte­rest envi­ron­ment, inves­tors are looking for attrac­tive invest­ment oppor­tu­ni­ties. These can also be debt investments.

Closed-end loan funds have become possi­ble in the first place because of the new envi­ron­ment. Previously, the issu­ance of loans by funds failed due to the requi­re­ment to obtain a license under banking super­vi­sion law. A fund could never acquire such a permit because the requi­re­ments for a fund mana­ger could not be met. The new regu­la­ti­ons clarify that a banking license is not requi­red for closed-end EU funds with only profes­sio­nal (and semi-profes­sio­nal) investors.

The taxa­tion of loan funds and their inves­tors depends on the legal form of the fund vehicle. In the case of German funds, one possi­ble option is a part­ner­ship, e.g., a part­ner­ship with a part­ner. a closed-end invest­ment limi­ted part­ner­ship. The tax conse­quen­ces are likely to be more favorable for a dome­stic part­ner­ship if it is asset-mana­ging (i.e., not “commer­cial”) in the tax sense: final with­hol­ding tax for private inves­tors; no German tax return obli­ga­ti­ons for non-German inves­tors. Such asset-mana­ging status should be achie­va­ble for loan funds — taking into account the invest­ment stra­tegy of a “typi­cal” loan origi­na­ting fund.

The manage­ment of funds orga­ni­zed as part­ner­ships (AIF) has so far been subject to VAT in Germany — unlike in most other EU member states. The fact that this viola­tes Euro­pean law has long been warned and was recently confirmed by the ECJ ruling of Decem­ber 9, 2015. In our opinion, as a result of the ruling, Germany is “obli­ged” to extend the afore­men­tio­ned VAT exemp­tion to all invest­ment assets, i.e. also to loan funds. Whether and in what form this will take place is one of the most exci­ting tax issues at present.

On the other hand, loan funds may qualify as invest­ment funds within the meaning of the Invest­ment Tax Act. Follo­wing the entry into force of the Invest­ment Tax Act on Janu­ary 1, 2018, a distinc­tion will proba­bly have to be made between so-called public invest­ment funds and special invest­ment funds. The former will then presu­ma­bly be subject to a new, non-trans­pa­rent taxa­tion regime. Accor­din­gly, although the Fund itself is subject to tax on certain income from German sources. Howe­ver, inte­rest income at the fund level should gene­rally be tax-exempt and only (fully) taxed at the inves­tor level. The so-called invest­ment tax trans­pa­rency prin­ci­ple will conti­nue to apply to special invest­ment funds, although it will be heavily modi­fied as of 2018.

Patri­cia Volhard, LL.M.
Private funds, fund struc­tu­ring, super­vi­sory law

With P+P since 2005, attor­ney at law in inter­na­tio­nal law firm in Frank­furt and Paris (1999 — 2005). Admit­ted to the bar in Frank­furt in 1999 and as Avocat à la Cour in Paris in 2000. Law studies in Saar­brü­cken, Frank­furt a. Main, Stras­bourg, studies at the LSE, London School of Econo­mics and Poli­ti­cal Science (LL.M. Banking and Finance 1999).

Dr. Peter Bujot­zek, LL.M.
Private funds, tax law

Specia­liza­tion: private equity fund struc­tu­ring, invest­ment law and invest­ment tax law. Mr. Bujot­zek has been with P+P since 2008. Legal clerk­ship in Duis­burg, Düssel­dorf and New York (2006–2008). Rese­arch assistant at the Insti­tute for Inter­na­tio­nal Busi­ness Law at the Univer­sity of Müns­ter (2004–2006).