GERMANY Law and Practice Contributed by: Tarek Mardini, Antonia Puglisi and Enzo Biagi, POELLATH
German open-end special funds can originate loans of up to 50% of their invested capital. The AIFMs which manage loan-originating AIFs are required to have adequate liquidity and risk manage - ment systems in place. Lastly, the AIFs are also allowed to restructure exist - ing loans. Although the German rules for AIFs that originate loans will change with the implementation of the AIFMD II (see 2.5 Loan Origination ), the German legislator cur - rently intends to maintain the ban on consumer credit loans by AIFs. Litigation Funding Funds which are allowed to grant loans are also mostly allowed to fund litigation. However, there is a limitation with regard to the funding of litigation. AIFs which are managed by fully authorised AIFMs are only allowed to invest in assets which can be valued at any time. This is challenging with respect to financing of litiga - tion, as the risk of the loan depends on the legal risk of the respective financed lawsuit, which is difficult to assess independently. Therefore, significant practical challenges remain when setting up litigation funding AIFs under the German fund regime. Cannabis and Cannabis-Related Investments Funds can invest in cannabis or cannabis-related portfolio companies, as long as the portfolio compa - ny’s activity is legal or it has the necessary licence to do so. In other words, German funds are not allowed to invest in an activity which is illegal. Other than that, there are no restrictions with regard to cannabis or cannabis-related investments. 2.7 Use of Subsidiaries for Investment Purposes The use of subsidiaries is common, particularly with regard to private equity funds and real estate funds. The advantages are often structural, such as creat - ing different tiers of structural subordination (not just contractual subordination) of lenders or making use of leverage (in this case, private equity funds). From a tax and regulatory perspective, the use of subsidiaries is also relevant, as leverage should ideally be used at
the subsidiary level, since leverage at the fund level (however, only regarding private equity and venture capital) may trigger both qualification of the fund as being engaged in a trade or business for German tax purposes, as well as trigger the lower EUR100 mil - lion assets-under-management threshold requiring full authorisation for the fund manager under the AIFMD. In addition, real estate funds tend to use subsidiaries to better handle real estate transfer tax issues and make shareholder loans tax-deductible at the subsidi - ary level (to a certain extent). 2.8 Local/Presence Requirements for Funds Germany requires either a German-based fund man - ager or a fund manager with an AIFMD passport. The fund manager can, however, outsource portfolio management to an investment manager abroad. Such outsourcing is, for instance, quite common with regard to special funds established as a separate managed account for a specific German institutional investor. The AIFM needs to have sufficient substance in Ger - many, both from a regulatory and tax perspective. This basically translates into having sufficient physi - cal presence in terms of senior management and staff in Germany. On the regulatory side, BaFin follows the European Securities and Markets Authority (ESMA) Brexit guidelines with regard to substance require - ments (ESMA34-45-344). Directors of a corporate fund may not need to be Ger - man residents. However, foreign directors must make sure that corporate decisions are made in Germany (this can happen on a well-documented fly-in basis). A local general partner is required for German partner - ship funds. Germany follows the “seat theory” with regard to the applicable law in the case of partner - ships. Funds are not expected to maintain business prem - ises or hire local employees in Germany. 2.9 Rules Concerning Service Providers Fund Depositary A fund depositary is necessary if the fund is managed by a fully authorised manager – based on the AIFMD.
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