GERMANY Trends and Developments Contributed by: David Jansen, Wulf Kring, Maria Risse and Marcel Seemaier, Willkie Farr & Gallagher LLP
The AIFMD II Implementation The legislative process for the implementation of the so-called Fund Market Strengthening Act ( Fondsmark- tstärkungsgesetz or FMSG), which aimed to simplify and enhance the regulatory framework for investment funds in Germany, came to an abrupt halt due to the change of government in Germany. However, fortu - nately, the new government has picked up the work again and has now re-introduced many of the FMSG’s proposals via the so-called Fund Risk Limitation Act ( Fondsrisikobegrenzungsgesetz or FRBG), the initial draft of which was published by the Federal Ministry of Finance in August 2025. The main purpose of the new draft act is the imple - mentation of the amendments made to the European Directives 2009/65/EC (Undertakings for the Collec - tive Investment in Transferable Securities Directive or UCITS-Directive) and 2011/61/EU (Alternative Invest - ment Fund Managers Directive or AIFMD) into German law and includes the following: • Liquidity management tools – the managers of open-end funds will be required to select at least two appropriate liquidity management tools for their funds with the aim of strengthening the resil - ience of the fund market. • Reporting obligations – the adjusted reporting obligations will provide BaFin with better oversight of the outsourcing to fund management functions, especially to third countries. • Loan origination by investment funds – the existing national regulations on loan origination by invest - ment funds will be aligned with the new European requirements, in order to create equal competitive conditions within the EU for such loan origination. Among other provisions, the draft act includes limits on the extent to which such funds may incur debt and extend loans to other financial market participants. Update on Formalities for Repayment of Paid-In Capital to German Investors Tax-Free The exemption from German dividend taxation for the repayment of paid-in capital by a foreign corporation to investors subject to German tax is contingent upon compliance with specific formal requirements. Effec - tive from 1 January 2023, the procedural regulations
that previously solely governed repayments by EU corporations have been expanded to also cover non- EU entities. Following this expansion, it has become apparent that the relevant co-operation procedures are playing a bigger role in the side letter negotia - tions between German taxable investors and non-EU fund sponsors. Experience so far has shown that the agreed co-operation procedures vary significantly and may range from best efforts made by sponsors to procure and support such German tax filings of non- German top-level corporate subsidiaries of respective funds, to such support only being offered with respect to a substantial upstreaming to the transparent fund (eg, following an exit at lower-tier level), or to no sup - port in view of the large number or type of investments made by the respective fund. To benefit from this exemption, the corporation must submit a formal application to the German Federal Central Tax Office ( Bundeszentralamt für Steuern ) no later than 12 months after the close of the financial year in which the capital repayment took place. If the corporation fails to adhere to this deadline, or if the application is denied due to formal deficiencies, the repayment will be treated as a taxable dividend under German tax law. Although this formal proce - dure presents taxpayers with substantial challenges, in line with a recent decision of the Tax Court of Lower Saxony of 3 July 2025, it should be expected that tax courts will take the view that neither the German constitution nor the European free movement of capi - tal entitle foreign corporations to use other individ - ual options outside of the formal procedure set out in Section 27 paragraph 8 of the German Corporate Income Tax Code to demonstrate and verify such tax- free repayment of paid-in capital. CFC – Potential Changes to German CFC Tax Implications in Connection With Partnership-Type Investment Funds In December 2023, the German Federal Central Tax Office published new principles for the application of the Foreign Tax Act ( Außensteuergesetz ), which are of particular relevance for outbound investments by Ger - man investors via domestic or foreign partnerships. The new circular also contains detailed guidance on the German controlled foreign corporation (CFC) tax- filing obligations that must generally be observed by
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