Sub-Threshold AIFM (Small AIFM) in Germany: How to Structure It Properly

The management of alternative investment funds (AIFs) in Germany is, as a rule, reserved to capital management companies (Kapitalverwaltungsgesellschaften – KVG, or AIFM) holding a full authorisation from BaFin. For foreign fund sponsors seeking to access the German market, this often raises practical challenges. In particular, reliance on the EU passporting regime may not be available, and the requirements of the German National Private Placement Regime (NPPR) are, in many cases, perceived as onerous or difficult to meet.

As an alternative, foreign sponsors may consider establishing a German sub-threshold AIFM (also known as small AIFM or AIFM light) under Section 2(4) of the German Investment Code (KAGB). This registration-based regime allows access to the German market under a significantly lighter regulatory framework. This article provides an overview of the key structuring considerations, regulatory requirements and legal consequences associated with setting up a German sub-threshold AIFM.

AuM thresholds: up to EUR 100 million with leverage; up to EUR 500 million without leverage

A key prerequisite for a sub-threshold alternative investment fund manager (AIFM light) is that the assets of the AIFs it manages must not exceed certain quantitative thresholds.

• EUR 100 million for leveraged AIFs: Where the AIFM applies leverage at the level of the AIF, the lower threshold of EUR 100 million applies. Leverage generally covers any method by which the exposure of an AIF is increased, including through borrowing, securities lending, embedded leverage in derivatives or by other means. Leverage is deemed to exist even where it is not applied directly at AIF level but at the level of an SPV or a target entity, subject to certain exceptions for private equity and venture capital funds.

• EUR 500 million for unleveraged AIFs: Where the AIFM does not apply leverage, the higher threshold of EUR 500 million applies.

As a general rule, the value of the portfolio assets under management must be determined in accordance with the valuation rules laid down in the laws of the AIF’s home jurisdiction and, where applicable, in the AIF’s constitutional documents. Where the AIF is domiciled in Germany, valuation is carried out in accordance with the accounting and bookkeeping rules of the German Commercial Code (HGB), unless specific derogations apply.

Eligible asset classes

As a rule, a registered KVG (AIFM light) is not restricted in its choice of asset classes that may be acquired for an AIF. Eligible assets include real estate, private equity, securities, derivatives, cryptocurrencies, loans and other types of investments.

Restriction to the management of special AIFs

Within the German AIFM light regime, the sub-threshold AIFM acquires the right to manage special AIFs (Spezial-AIF). Special AIFs are alternative investment funds whose units or shares may be acquired exclusively by professional investors and semi-professional investors. The category of the semi-professional investor is not derived from the AIFMD, but is a concept specific to German law, as set out in the German Investment Code (KAGB).

Professional investor definition

A professional investor is any investor who qualifies as a professional client within the meaning of Annex II to Directive 2014/65/EU or who may be treated as a professional client upon request.

Semi-professional investor definition

A semi-professional investor is: (a) any investor who  (aa) undertakes to invest at least EUR 200,000,  (bb) declares in text form, in a document separate from the investment commitment agreement, that they are aware of the risks associated with the intended commitment or investment,  (cc) whose expertise, experience and knowledge are assessed by the AIF management company or by a distribution entity appointed by it, without assuming that the investor has the market knowledge and experience of the investors listed in Annex II, Section I, to Directive 2014/65/EU,  (dd) in respect of whom the AIF management company or the distribution entity appointed by it is, taking into account the nature of the intended commitment or investment, sufficiently satisfied that the investor is capable of making their own investment decisions and understands the associated risks, and that such commitment is appropriate for that investor, and  (ee) to whom the AIF management company or the distribution entity appointed by it confirms in text form that the assessment referred to in sub-item (cc) has been carried out and that the conditions set out in sub-item (dd) are met; (b) any managing director or employee referred to in Section 37(1) KAGB of the AIF management company, insofar as they invest in AIFs managed by that AIF management company, or any member of the management board or executive board of an externally managed investment company, insofar as they invest in that externally managed investment company; (c) any investor who undertakes to invest at least EUR 10 million in an investment fund; or (d) any investor organised as  (aa) an institution under public law,  (bb) a foundation under public law, or  (cc) a company in which the German federal government or a German federal state holds a majority interest, provided that, at the time of the investment, the federal government or the relevant federal state invests or is invested in the relevant special AIF.

Distribution to retail investors is not permitted.

In addition to managing special AIFs, a registered alternative investment fund manager may also manage European Venture Capital Funds (EuVECA) within the meaning of Regulation (EU) No 345/2013 and European Social Entrepreneurship Funds (EuSEF) within the meaning of Regulation (EU) No 346/2013. This requires, however, an additional registration in accordance with the requirements of those Regulations. EuVECA and EuSEF may be marketed to professional investors as well as to investors who undertake to invest at least EUR 100,000 and who declare in writing, in a document separate from the investment commitment agreement, that they are aware of the risks associated with the intended commitment or investment. This latter investor category is a specific concept under EU law and is subject to less stringent requirements than those applicable to semi-professional investors under German law.

Investment Law | KRONSTEYN

Marketing of the AIF in Germany and cross-border marketing

By virtue of its registration, a small AIFM is entitled to market the AIFs it manages to professional and semi-professional investors in Germany, i.e. to promote such AIFs and to accept subscriptions.

The use of the AIFMD marketing passport for marketing in other EU or EEA Member States is not available, as this is reserved to fully authorised AIFMs. Instead, the permissibility of cross-border marketing is governed by the respective national laws of the target jurisdictions. In some countries, marketing is strictly prohibited; in others, marketing may be permitted subject to prior notification of the local supervisory authority and certain limitations. As a rule, no cross-border marketing is deemed to take place where the initiative to invest in the AIF originates exclusively from the investor (principle of reverse solicitation or “passive marketing”); supervisory authorities apply strict standards in this regard.

Where the sub-threshold AIFM also manages a EuVECA or EuSEF, the European passport is available for those funds. In this context, the EU/EEA Member States in which marketing is intended must be notified to BaFin.

Design of the AIFM and AIF structure

Both the registered AIFM and the AIFs it manages are subject to certain structural requirements. Some of the key elements are outlined below:

• Legal form requirements for the AIFM: The AIFM must be constituted as a legal entity (GmbH, AG or SE) or as a commercial partnership (KG or OHG). Registration of natural persons, civil-law partnerships (GbR), foundations or associations is not permitted.

• Legal form requirements for AIFs: A legal form requirement also applies to AIFs managed by an AIFM. AIFs may only be established as legal entities or as commercial partnerships with a legal entity acting as the general partner with unlimited liability. Where the AIF is structured as a legal entity, German law permits in particular the GmbH, AG and the investment stock corporation with variable capital (Investmentaktiengesellschaft mit veränderlichem Kapital), while EU law also allows the SE. Where the AIF is structured as a commercial partnership under German law, the KG and the open-ended investment KG (offene Investment-KG) are available. In addition, foreign AIFs, including third-country AIFs, may also be established. In all cases, any obligation of investors to make additional capital contributions must be excluded. It is not permissible to establish an AIF on a purely contractual basis; in particular, the use of trust or special asset structures (Treuhand- or Sondervermögen) is not permitted for a sub-threshold AIFM (small AIFM).

• External and internal management: The AIFM may operate either as an external or as an internal manager. Under an external management model, the AIFM manages the portfolio of a separate legal entity on the basis of a management agreement. Under an internal management model, the AIFM manages its own assets. Owing to the greater flexibility of structuring options, the external AIFM model is by far the most commonly used in practice.

• Open-ended and closed-ended funds: An AIF may be structured either as an open-ended or as a closed-ended fund.

Tax treatment of the AIF and its investors

The tax treatment of the AIF and its investors depends to a large extent on the legal structuring of the AIF. Depending on the type of assets held and the specific objectives of the initiators, various structuring approaches are available, each offering a wide range of variants aimed at achieving the application of particular tax regimes. At a high level, the following distinctions can be made:

• Classical tax transparency: Where the AIF is established as a commercial partnership (see above) that is treated as tax transparent, taxation of income does not occur at AIF level but at investor level. However, the AIF may be subject to German trade tax (Gewerbesteuer) if it carries on a commercial activity or is deemed to be commercially characterised or tainted, unless the AIF qualifies as a corporate investment company within the meaning of the UBGG. For investors subject to tax in Germany, any trade tax incurred may, to a certain extent, be credited against their personal income tax. The German Investment Tax Act (InvStG) does not apply to commercial partnerships.

• Synthetic partial transparency: Where the AIF is established as a legal entity, income is taxed at the level of the AIF; the same applies to commercial partnerships that opt for indirect taxation. In practice, however, the German Investment Tax Act (InvStG) typically applies, resulting in only a partial liability to corporate income tax. This means that only certain categories of income are subject to corporate income tax at AIF level, in particular domestic dividend income, domestic real estate income and certain other domestic-source income; as a rule, no trade tax liability arises. At investor level, investment income is taxable; however, specific partial exemptions apply (for example, generally 60% in the case of real estate funds). The special tax regime applicable to special investment funds (in the tax law sense) will generally not be available to sub-threshold AIFMs for the special AIFs they manage, as they are not subject to prudential supervision of assets held for collective investment. In this respect, the German Federal Ministry of Finance (BMF) requires, by way of example, state supervision of the reliability and professional suitability of the senior management, which is not the case under a mere registration pursuant to Section 2(4) KAGB.

German investment tax law is characterised by a wide range of special rules, and the tax implications depend on the specific investment strategy and the objectives of the initiator. Tax effects should therefore always be assessed on a case-by-case basis.

Investment Law | KRONSTEYN

Ongoing obligations of registered AIFMs

In addition to the one-off registration requirement, a sub-threshold AIFM is also subject to ongoing regulatory obligations.

• Ongoing monitoring of thresholds: The favourable regulatory regime under the KAGB for sub-threshold AIFMs applies only as long as the relevant thresholds (EUR 100 million / EUR 500 million) are not exceeded. The AIFM must monitor compliance by continuously recording the value of the assets under management in appropriate records, which must also reflect, inter alia, subscriptions and capital distributions. A temporary breach of the applicable threshold is harmless. However, where the threshold is exceeded on a more than temporary basis, the KAGB requires the AIFM to apply for a full authorisation.

• Annual reporting to BaFin: A sub-threshold AIFM is required to report annually to BaFin certain information on the assets under management and specific risks of the AIF. The reports must be prepared in XHTML format and submitted to the supervisory authority. BaFin has published guidance on this in an information sheet.

• Annual financial statements and management report: As a rule, a sub-threshold AIFM must prepare its annual financial statements and management report in accordance with the HGB requirements applicable to capital companies; this also applies where the AIFM is structured as a commercial partnership with a natural person acting as the general partner with unlimited liability.

• Statutory audit: The annual financial statements and the management report must be audited by a statutory auditor even where such an audit would not otherwise be required under the HGB. The audit report must be submitted to BaFin. Whether the AIF itself is subject to a statutory audit depends on the applicable requirements of the HGB.

• Anti-money laundering oversight: Registered capital management companies (including AIFMs) qualify as obliged entities within the meaning of the German Anti-Money Laundering Act (GwG) and are therefore required to implement an AML risk monitoring framework and to appoint a money laundering reporting officer.

Specific additional requirements apply where a sub-threshold alternative investment fund manager grants loans on behalf of an AIF. In this case, the AIFM must comply with certain lending-related compliance obligations that also apply to fully authorised AIFM.

The registration procedure for sub-threshold AIFMs

Where an initiator intends to rely on the exemption under Section 2(4) KAGB, a registration application must be submitted to BaFin. BaFin has published detailed guidance on the requirements for such applications in an information sheet.

The registration procedure itself can usually be completed very swiftly, typically within approximately one month. More time should, however, be allowed for the design and structuring of the AIFM/AIF setup.

Where, in addition to the registration of the sub-threshold AIFM, a registration as a manager of EuVECA or EuSEF is also sought, a longer processing period and higher costs must be expected. This is because EuVECA/EuSEF registration entails additional compliance obligations and a more extensive documentation burden vis-à-vis BaFin.

FAQ on the German AIFM light regime

May a special AIF managed by a German sub-threshold AIFM also be marketed to retail investors?

No. Special AIFs may be marketed exclusively to professional and semi-professional investors. Where the sub-threshold AIFM also manages a EuVECA or EuSEF, marketing to retail investors is, in principle, permitted, provided that such investors commit to an investment of at least EUR 100,000.

May a German sub-threshold AIFM also manage foreign special AIFs?

In principle, yes. The German AIFM light regime is not limited to AIFs established under German law.

In which asset classes may a sub-threshold AIFM invest?

The choice of asset classes in which a sub-threshold AIFM may invest is not restricted. Eligible assets include, inter alia, real estate, private equity, securities, derivatives and cryptocurrencies.

May a sub-threshold alternative investment fund manager make use of the EU passporting regime?

No. This is reserved exclusively to fully authorised AIFM.

May a sub-threshold AIFM also market units or shares in a special AIF abroad?

This is possible to the extent permitted under the applicable foreign law. In some jurisdictions, marketing is allowed following notification of the competent authority, while in others a full authorisation is required.

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Your contact person: Attorney-at-law Dr. Hendrik Müller-Lankow.