Tuesday, January 04, 2011

German Legislation Implements UCITS IV Directive for Mutual Funds; Tax Changes Also Made

Germany has passed legislation implementing the EU directive on investment funds known as UCITS, undertakings for collective investment in transferable securities. The UCITS IV Directive aims to increase the efficiency of the investment fund business as well as to create a competitive framework for fund product providers. A high level of uniform investor protection will also be put in place throughout the EU. EU Member States are required to implement UCITS IV by July 1, 2011.

The German legislation implements the UCITS IV Directive (Directive 2009/65/EC) by making changes to Germany’s investment law. In view of the similarity of interests involved, the provisions will also apply to funds not harmonized by the UCITS IV Directive. These are known as non-UCITS funds, such as open-ended real estate funds.

The German legislation also contains changes in fund taxation.
Under UCITS IV, as implemented in the legislation, investment companies must provide investors with a two-page document containing easy-to-understand information about the main characteristics of an investment fund. The Directive is also designed to facilitate cross-border fund management by investment companies. UCITS IV facilitates cross-border marketing of funds by allowing regulators in different countries to directly exchange the documents that are required for the purposes of marketing fund units in another EU country. The Directive harmonizes requirements for domestric and cross-border fund mergers.

The Directive also enhances a fund’s efficiency by enabling cross-border master-feeder structures. In such cases, a feeder fund places almost the entirety of its assets into a master fund and risk diversification takes place indirectly at the master-fund level.

Building on the provisions about mergers and master-feeder structures contained in the UCITS IV Directive, the German legislation contains new requirements for investment companies to provide investors with information using durable media (such as letters and e-mails). This provision is designed to improve the information available to investors about a fund’s costs or investment strategy.

The new German legislation also enhances the conditions for micro finance funds by enabling domestic funds to invest in the uncertificated loan claims of micro finance institutions. The aim is to reduce the barriers to this kind of investment. The existing requirements that Germany’s investment law places on micro finance institutions had precluded the establishment of micro finance funds in Germany.

Under the UCITS IV Directive, investment companies can be authorized to conduct cross-border management of funds. Because of that, it was necessary to make changes in tax law to ensure that investment funds can be categorically classified as foreign or domestic for tax purposes.

Independent of the implementation of the UCITS IV Directive, there was a need to change the rules about the withholding of capital yields tax on shares and investment units held in collective safekeeping. The new rules, which will take effect in 2012, are being introduced to prevent tax planning in the case of short selling around the time of the dividend record date.