Germany's Ministry of Finance on 5 March published a paper outlining the most relevant issues of its Financial Market Promotion Plan 2006 (FMPP). The plan, which aims to strengthen the German capital market, both internally and internationally, should have positive tax consequences for foreign investment funds, particularly hedge funds. The FMPP includes provisions that address:
. a proposed Investment Act 2003 and accompanying Investment Taxation Act;
. hedge funds and alternative investments;
. the securitization market and asset-backed securities; and
. the elements of a recently announced 10-point program for restoring investor confidence.
Investment Act 2003
The proposed Investment Act 2003 would eliminate the competitive disadvantages that the German funds sector has repeatedly lamented in past years, thus counterbalancing the advantages of locations such as Ireland and Luxembourg.
The Investment Act 2003 would implement the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and change the environment in which investment funds are issued and managed in Germany. A broader range of investment fund structures would be possible because the statutory fund types that currently exist would cease to apply. As a consequence, innovative fund structures (for example, straight derivative funds) that also may operate on a cross-border basis would become possible.
Furthermore, the new Investment Act is intended to make the supervision of investment funds in Germany more efficient. Approval procedures for the issuance of new funds would be tightened, and the duration of the approval would be shortened considerably. The federal financial supervisory authority (BaFin) would thus be able to concentrate on more critical cases.
The legal framework would become more flexible, so that various statutory regulations would be outsourced to executive rulings. Regarding statutory regulations on derivatives for funds, for example, this would ensure that new market developments could be taken up by the legislature on short notice.
For the investor, the transparency of fund investment would be improved, particularly regarding cost allocation arrangements and information about the funds. With the introduction of a so-called simplified sales prospectus, the investor would receive all the relevant information about an investment fund at a glance.
The Investment Act 2003 also would contain a section of regulations concerning hedge funds. In principle, the act would enable domestic and foreign hedge funds to sell units to institutional and private investors in Germany in the same way. Elaborate detours (for example, the sale of structured products, such as hedge fund certificates) would therefore become redundant.
A clear and simple approval procedure would be regulated by the BaFin. With the exception of the general principle of risk spreading, there would be no specific legal guidelines concerning investments. Even the use of borrowed funds and the implementation of short selling would be permitted without restriction. To improve transparency, the introduction of a reporting requirement for short sales is being considered.
Investor protection, particularly the protection of private investors, would also play an important role in the case of alternative investments. The new regulations would include guidelines regarding product information in the prospectus and in the contract terms. In addition, the private investor would be permitted to invest only in funds with a broad risk spread. There also would be a requirement to provide an explicit warning informing the investor about the possible risk of a total loss of his or her invested capital.
Investment Taxation Act
The tax regime for fund investment would be established in a separate Investment Taxation Act. The taxation of income from foreign investment funds would be revised so that the treatment of domestic and foreign funds would be non discriminatory. In addition, special provisions in the Investment Taxation Act would ensure that hedge funds are not disad-vantaged, as compared with standard funds, from a taxation viewpoint. This new structure is regarded as a major requirement for increasing Germany's attractiveness as a financial center for hedge funds.
Securitization and Asset-Backed Securities
The legal and economic framework for the issuance of asset-backed securities in Germany would be improved to make it easier for credit institutions to securitize credit claims and risks from credit operations in Germany and to refinance them in the capital market. Special purpose companies, which assume credit claims from the credit institutions and organize the securitization, would therefore be exempt from trade tax.
A decisive factor in successful financial market promotion is the restoration of investor confidence, so investor-protection concerns are a focal point of a 10-point program. The decisive aspects are:
An investigatory enforcement authority, organized under civil law and operating under governmental supervision, will be established to ensure the reliability of corporate accounts and the clarity and accuracy of balance sheets. The BaFin will assist the enforcement authority with the implementation of all the necessary enforcement measures.
Liability of Executive Organs
Managers' personal liability also will be increased. Consequently, in the future, management and supervisory board members will be liable, with their own assets, for the distribution of false ad hoc announcements. This will eliminate the contradiction in the existing regulation, whereby shareholders must dig into their own pockets if they file an action against a company. This regulation may be extended to encompass additional information relevant to the capital markets (for example, comments made in speeches or interviews).
Grey Capital Market
Many billions of euros of investor money trickle away annually in the informal grey capital market. A prospectus obligation will be introduced for public offerings in the grey capital market, resulting in a stricter liability for those making the offer.
Analysts and Rating Agencies
The aim is to avoid conflicts of interest for financial analysts and rating agencies and to increase the independence of analyses and credit rating assessments.
With the implementation of the Fourth Financial Market Promotion Act, the rules of good conduct of the Securities Trading Act were extended to analysts operating in the securities services sector. The BaFin is currently finalizing those rules. However, under the 10-point program, analysts' independence will be further increased. One issue now under consideration is whether, in the future, analysts' income should be dependent on the economic success of their own trading activities or on commissions from investment banks.
The activities of the U.S. Securities and Exchange Commission, which apparently has decided on a strict separation between the analysis and investment banking sectors, are being followed with great attention.
Published by AMANNLawyers & Tax Accountants, Munich, Germany, a Germanlaw and tax accountingfirm.
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