Management fee for venture capital funds has been exempt from VAT since 1 July 2021

The German Fund Location Act extended Sec. 4 no. 8 h of the German VAT Code with effect from 1 July 2021. As a result, the management of venture capital funds is also exempt from VAT. This has significant implications for capital management companies.

The objective is to make Germany more attractive as a fund location

Germany has changed its tax law with the aim of improving the country’s international competitiveness as a fund location. Under Sec. 4 no. 8 h of the German VAT Code (Umsatzsteuergesetz – UStG) as amended on January 1, 2018, which is based on Art. 135 (1)(g) of the EU VAT Directive, the management of undertakings for collective investment in transferable securities (UCITS), of alternative investment funds (AIF) that are comparable to them and of pension institutions is exempt from VAT. The objective of the German Fund Location Act (Fondsstandortgesetz), which was signed into law on June 3, 2021, is to further support the innovation and growth potential of start-ups. This new Act also exempts the management of venture capital funds from VAT with effect from July 1, 2021. As recipients of the services provided by capital management companies are not usually entitled to deduct input VAT, this reform will lead to considerable tax advantages for the sector.

Implications for invoicing by capital management companies

Companies that charge a fee for the management of venture capital funds are not permitted to show VAT on invoices for such fees. If they nevertheless do so, this VAT is incorrect in terms of of Sec. 14c para. 1 German VAT Code. An option to make these fees subject to tax pursuant to Sec. 9 German VAT Code does not exist. Therefore, the recipient of the service is not entitled to deduct input VAT. However, simply by showing VAT on the invoice, the capital management company renders itself liable to pay this tax. If the invoice is corrected, the VAT can be claimed back from the tax office during the VAT return period that covers the invoice correction. However, this is only permitted if the VAT has been refunded to the recipient of the service.

The question with regard to invoicing is whether, in future, the company should bill only the originally agreed net amount or whether it should bill the gross amount without openly showing VAT on the invoice. This depends on the civil law agreement initially entered into, which must be carefully reviewed.

Invoices issued from 1 July 2021 must include a notice on the VAT exemption pursuant to Sec. 4 no. 8 h German VAT Code.

Implications for input tax deduction by capital management companies
As long as the management of venture capital was a VAT taxable service, capital management companies were entitled to deduct input VAT from purchases that were directly attributable to this output service. With respect to the deduction of input VAT on overheads, these management services improved the input VAT quota. Both of these deductions are no longer possible due to the reform. Therefore, if capital management companies only provide VAT exempt services, they can no longer deduct input VAT. This could also result in an obligation to correct input VAT pursuant to Sec. 15a German VAT Code.

In accordance with Sec. 9 para. 2 German VAT Code, if real estate companies lease properties to capital management companies that do not generate any VAT taxable turnover, such leases can no longer be subject to VAT. Existing lease agreements should be reviewed.