Germany: Application of the German Investment Act to Units in Foreign Funds: Circular by the German Financial Supervisory Authority

Last Updated: 14 January 2009
Article by Dr. Benedikt Weiser

Originally published 13 January 2008

Keywords: German Investment Act, foreign funds, German Financial Supervisory Authority, BaFin, Investmentgesetz, InvA, Germany, foreign pool of assets, Qualifying Assets,

On December 22nd, 2008 the German Financial Supervisory Authority (Bundesanstalt für die Finanzdienstleistungsaufsicht "BaFin") published circular 14/2008 (WA) ("Circular") on its interpretation of the scope of the German Investment Act (Investmentgesetz – "InvA") as amended on December 21st, 2007. The InvA governs the distribution of units in foreign funds in Germany. The Circular follows a draft which was published on the BaFin website on June 9th, 2008 (see Mayer Brown newsletter of June 2008). According to the InvA, a participation in a foreign pool of assets can be classified as a unit in a foreign investment fund subject to the InvA if the following criteria are met:

  1. The foreign pool of assets consists of certain assets as defined in section 2 para. 4 InvA ("Qualifying Assets"),
  2. the foreign pool of assets is composed according to the principle of risk diversification, and
  3. the shareholders have the right to redeem units or the foreign pool of assets is subject to a supervision by a public body (investment supervision).

Qualifying Assets (see (i) above) and Investment Restrictions

In determining the scope of the application of the InvA in terms of defining Qualifying Assets the Circular expands on an approach which had initially been introduced by the draft circular of June 2008.

According to the Circular, a foreign pool of assets can only be considered a foreign investment fund within the meaning of the InvA if more than 90 percent of such pool consists of Qualifying Assets. This general approach is modified by a set of investment restrictions which, according to the Circular, must be observed by the foreign pool of assets in order to qualify as a foreign investment fund within the meaning of the InvA. In brief and without purporting to be a complete list the restrictions are the following:

  1. For a foreign pool of assets that does not qualify as Spezialfonds (a Spezialfonds is a fund that does not admit individuals as investors) and if the pool of assets includes investments in

    • infrastructure companies and real estate, these investments must account for at least 60 percent of the value of the foreign pool of assets.
    • unlisted securities and unlisted participations in companies; these investments must not account for more than 20 percent of the value of the foreign pool of assets.
    • precious metals, derivatives and unsecuritized (unverbriefte) loans; these investments must not account for more than 30 percent of the value of the foreign pool of assets.

  2. For a foreign pool of assets that qualifies as a Spezialfonds (no individuals as investors) and that includes investments in unlisted securities and unlisted participations in companies, these investments must not account for more than 20 percent of the value of such a foreign pool of assets.
  3. For a foreign pool of assets that qualifies as a hedge fund for purposes of the InvA and that includes investments in participations in companies, such investments must not account for more than 30 percent of the value of the hedge fund.

For the purposes of the Circular, investments in closed ended funds are typically qualified as participations in companies. The Circular does not explicitly state whether these investment restrictions need to follow from compulsory regulatory stipulations or from the investment restrictions that the fund adheres to by virtue of its terms.

Risk Diversification (see (ii) above)

Within respect to the principle of risk diversification the Circular confirms the rule of thumb which, in the absence of clear guidance by BaFin, has been developed by advisors, according to which risk diversification may be given where the foreign pool of assets consists of more than three assets with different investment risk characteristics. Risk diversification is also present if the investments are made in other entities which are themselves risk diversified. Risk diversification must be pursued by the vehicle with commercial intent. Mere liquidity management, that dominates the investment objective, does not constitute intentional risk diversification. Risk diversification that is achieved merely as a result of other business objectives ("by chance") does not constitute risk diversification within the meaning of the InvA. This seems to be a useful specification of what used to be discussed in the context of diversification as "entrepreneurial influence" (see also below details provided by the Circular for private equity funds).

Redemption Right or Investment Supervision (see (iii) above)

The Circular further states that a redemption right within the meaning of the InvA exists if the majority of the holders of units in the foreign pool of assets can claim redemption of their units. Individual agreements with a minority of shareholders are irrelevant. In the view of BaFin, there is a presumptive redemption right if a repurchase vehicle is obliged to purchase the shares of the shareholders, provided that this repurchase vehicle has sufficient funds to ensure the payment of the redemption price. To fulfill the redemption right criteria it is not necessary that the shareholders can redeem their shares at any time. It is sufficient if the redemption right is exercisable at predefined dates, provided the investors have at least one redemption window during any two year period. The analysis is unaffected if there are caps on redeemable amounts, provided the cap serves the purpose of investor protection. This is significant for structures such as "evergreen"-structures where soft redemption rights are granted subject to substantial look-up periods and management discretion.

As an alternative to providing a redemption right, a foreign entity could still be classified as foreign investment fund within the meaning of the InvA if the foreign entity is subject to supervision by a public body in its country of residence (investment supervision). Pursuant to the Circular, the supervision requirement is not fulfilled if the supervision only ensures the integrity and capability of the market, serves only for the purpose of monitoring certain tax requirements or is for registration purposes only.

On the other hand, supervision in this context exists, inter alia, if the purpose of the supervision is to

  • establish the solvency of an investment company; and
  • to verify the reliability and capability of the management; and
  • to monitor the ongoing compliance with applicable investment restrictions. In respect of this last requirement it is noteworthy that the draft of June 2008 had provided for each of the three purposes (alternatively) to be sufficient to assume a supervision in the meaning of the InvA. This has been changed to read as the purposes having to be pursued cumulatively.

Private Equity Funds

Private equity funds are specifically addressed in the Circular. They do not fall within the scope of the InvA, provided the funds acquire predominantly majority interests or blocking minority shareholdings and exert entrepreneurial influence over and above of the mere exercise of voting rights attached to the shares by taking management board seats in the portfolio companies.

In view of the restrictions for foreign investment funds on investments in unlisted participations (generally 20 percent of value) the extensive stipulations on entrepreneurial influences may prove to be redundant in practice.


The Circular has come into effect upon its publication on the Bafin web-site on December 22nd 2008.

The Federal Ministry of Finance (Bundesministerium der Finanzen or "BMF") has been involved in the process since the definition of foreign investment funds under the InvA is decisive for the application of the Investment Tax Act (Investmentsteuergesetz or "InvTA"). It is expected that the stipulations of the Circular will generally be adapted by the BMF for fiscal purposes and will replace the so called "limited partnership exemption" granted under the circular issued by the BMF on June 2nd, 2005 (so called "Anwendungsschreiben") on the interpretation of the InvTA. It is not yet clear whether there will be a grace period for the application of the Circular for fiscal purposes.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2009. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions