Fund processing

We regularly receive inquiries regarding the possibility of selling closed-end funds via a trading platform. Selling a closed-end fund on a secondary market exchange is one of several ways to dispose of a liable investment.

In principle, in the event of incorrect advice, the claim against the advisor, the person responsible for the prospectus or the initiator of the fund should first be checked. It is usually not advisable to terminate a closed-end fund share. At least information should be obtained beforehand about any negative settlement credit. In the worst case, a termination of the fund share would result in payment claims by the fund company against the investor.

Many factors when selling (for example how quickly a sale can take place and what price can be achieved in the end) your own share in a closed-end fund via the secondary market cannot be planned. On the one hand, this is due to the fact that there is no high order volume. On the other hand, it is because there is no regulated secondary market for closed-end funds. The process of selling a closed-end fund share on the so-called secondary market is more comparable to selling a car in an online car exchange than to selling shares on a regulated exchange. As a result, the sale of closed-end fund shares is the sale of a company share.

The process of selling the fund share

If you have decided to sell a fund share, a few things must be taken into account.

We have listed these for you in the following 5 points.

Please contact us if you have any further questions.

1. Choose a reputable trading platform

First of all, a reputable trading platform should be chosen. Experts can support investors, especially since the terms of sale and the actual costs associated with the sale often differ significantly from one another. In addition to the common secondary market platforms, the trust company of the fund company, the issuer or other institutions (institutional buyers) can also be a sensible solution. It is not advisable to rush into making the decision regarding a certain provider, as the price differences in the proceeds from provider to provider can often be very large.

2. Find buyers

The next step is to find a potential buyer. Since the supply and demand for closed-end funds on the secondary market cannot be compared with the demand for shares in large companies, the search for an interested party is usually tedious. The interested party must also be willing to pay the asking price.

In many of the cases that we are aware of, the desire of the investor to sell comes to an end in the early stages, as no interested parties respond to the price advertised. In this regard, a potential seller not only needs a steady hand, but also a good dose of luck. A certain understanding of the market is helpful here. The fund company or trust company can also provide a possible overview of the valuation of a share in a closed-end fund.

3. Check sales conditions

Once a buyer has been found who is willing to pay an acceptable price, the terms of sale must be carefully examined. This is because most of the contracts known to us do not contain any exemption from liability for the seller according to § 172 para. 5 of the German Commercial Code.

This means that the seller of a closed-end fund may still be asked to pay years after the sale. This applies in particular to distributions already received in the event that the fund is in difficulties or the fund company becomes insolvent. Sellers of a fund share should secure themselves before they finally agree to the sale.

Lawyers for fund processing / Sale of fund shares

The difficulties in selling a fund share often lie in the construct of a closed-end fund itself. In contrast to a share, which represents a company value, closed-end funds are often designed in such a way that they have a specific term. Many funds end with the sale of a financed property, such as a ship or a property, if the sale can be realized. Furthermore, closed-end funds often include tax advantages at fund or investor level, which are particularly attractive in the early stages. Therefore, the longer the holding period increases, the lower the value of the fund.

4. Tax consideration as entrepreneurial participation

Up until a few years ago it was possible to take advantage of considerable tax advantages with real estate, media and leasing funds. Although loss allocations from negative income can no longer be offset against other types of income as they used to be, tax advantages can still be achieved with closed-end funds. This is because negative income in the same income type can still be offset against positive income later.

Anyone who invests in a closed-end fund or a participation becomes an entrepreneur. The income from the investment then counts as income from commercial operations in the tax sense. In the case of a real estate fund, the income counts as rental and leasing income.

While open-ended funds are subject to withholding tax, income tax applies to participations and closed-end funds, as the investor acts as a (co-)entrepreneur. For the Tax office, the information on “Income from business operations” and “Income from renting and leasing” must be accompanied by a comparison of income and expenditure. Taxation is then based on the respective personal tax rate.

Special characteristic of ship funds: Tonnage tax

Due to special regulations for the transport of goods, the tax liability for ship funds can be calculated according to the size of the ship. This means that it is not the actual income that is taxed, rather only the size of the ship in tons of freight volume. This regulation, called “tonnage tax”, is not a tax in the strictest sense of the word, but rather a type of profit determination. This can sometimes significantly reduce the taxable income, as relatively small profits are factored in.

Special characteristic: Double taxation treaty

Investors can also take advantage of lower tax rates abroad. If the investment is made abroad, the pre-tax return increases with the lower tax burden abroad. Savings can also be achieved through higher tax allowances abroad. Please also note the regulations on tax exemptions for inheritance and gift taxes. There is also potential here for tax advantages for closed-end funds

5. What does our law firm offer you?

  • We will contact various secondary market stock exchanges, fund companies, trustees and institutional buyers on your behalf.
  • We determine the conditions of the secondary market exchanges.
  • We provide you with the information on the sales opportunities, the various price indications on the secondary market exchanges and of course, if necessary, also inform you about the possibility of direct trading.
  • We explain in detail the costs as well as the advantages and disadvantages of the individual secondary market exchanges that would arise if the various secondary market exchanges were commissioned.
  • We negotiate on your behalf in order to achieve the best possible conditions for you when selling the fund shares.
  • We advise you comprehensively with regard to the regulations of the purchase and assignment contract, so that you know exactly what is involved with the purchase and assignment contract. This applies in particular to the exemption from liability (see above)

While the secondary market exchanges are of course purely a broker
between the seller and buyer, we only have your interests in mind and take care of the
practical and legal
processing for you.