The draft decree shall generally apply to all closed-end funds in the legal form of a partnership, regardless of whether they generate business or asset managing income, as well as to entire projects and comparable models with only one investor.

Most importantly, the draft decree expresses the view of the German tax authorities regarding the following criteria that have been under discussion in the past 5 years:

• Indicative definition of a pre-formulated contract,
• When do investors have a significant influence on the fund,
• What expenses do classify as fund establishment costs,
• When does the Investment period of the fund begin and end, and
• How are the fund establishment costs to be allocated in case of multi-year investments and multiple assets.

While the majority of relevant issues has already been addressed in the draft decree, it still does not clearly define some of the most significant terms such as the pre-formulated contract, significant influence or the scope of expenses being fund establishment costs. Nonetheless, the decree provides additional guidance on how to apply these criteria which should be helpful in practice.

Furthermore, the draft decree provides more specific information on the investment period. It states that for multi-object funds, it is reasonable to assume that the investment period is completed when 80% of the overall investment volume has been invested.

The considered approach of the BMF with regards to the treatment of fund establishment costs for multi-year-investments/multi-asset funds generally aligns with current practice. However, the position of the BMF appears surprising and inconsistent when both equity and debt investments are made in the same target company. In such cases, the draft decree only allows for an allocation of fund establishment costs only to the equity investment. A coherent argument for limiting the allocation only to the equity part is currently not presented, even though this allocation can have a significant negative tax effect upon the sale of the investment.

It remains to be seen to what extent the final decree will ultimately contain more specific statements that can help to eliminate the uncertainties of interpretation and to what extend the limiting allocation to the equity investment in the above-described case is considered.

In case of further questions or more insights on our fund compliance services please contact our fund compliance team (fee.hartan@pwc.com) who thankfully shared these insights within our Deals Tax Newsflash.