BaFin Confirms Cayman Funds Remain Eligible for German Marketing Under AIFMD II

The Concern: New Barriers for Non-EU Funds

Cayman Islands-domiciled funds are a mainstay of the alternative investment industry, accounting for roughly one-third of all private fund assets globally. However, recent regulatory changes raised serious concerns that these vehicles might be excluded from Germany’s National Private Placement Regime (NPPR).

To implement AIFMD II, the German government introduced the Fondsrisikobegrenzungsgesetz (Fund Risk Limitation Act), amending the German Investment Code (KAGB) which is currently in the legislative process. The critical change is found in the new draft of §330(1) No. 3(c) KAGB, which stipulates that non-EU AIFMs can only market in Germany if the third country meets two strict tax cooperation criteria:

1. Effective Tax Information Exchange: The jurisdiction must have an agreement with Germany that fully complies with Article 26 of the OECD Model Tax Convention.
2. No Blacklisting: The jurisdiction must not appear on the EU’s list of non-cooperative tax jurisdictions (EU Blacklist).

The Problem

Because the Cayman Islands does not levy income tax, it lacks a comprehensive Double Taxation Agreement (DTA) with Germany. Many industry observers feared that without a formal DTA, the Cayman Islands would fail the "Article 26" test, effectively closing the German market to Cayman funds.

BaFin’s Confirmation

Given the stakes, Dechert sought official clarification from the Federal Financial Supervisory Authority (BaFin) on how the revised § 330 KAGBwould apply to Cayman fund structures. We presented a detailed analysis demonstrating that while the Cayman Islands lacks a direct double-taxation treaty, its transparency framework meets the substantive requirements of the new law.

BaFin has now confirmed our reasoning. The regulator clarified that the law does not mandate a formal DTA. Instead, it requires an agreement ensuring information exchange equivalent to OECD standards and confirmed that the Cayman Islands remains eligible based on the following:

BaFin confirmed that the new §330(1) No. 3(c) KAGB will not prevent marketing of Cayman Islands-based funds in Germany. The authority clarified that the law's reference to a double taxation agreement does not require a formal DTA, but rather an agreement ensuring information exchange equivalent to Article 26 of the OECD Model Tax Convention. BaFin explicitly stated that the Multilateral Convention on Mutual Administrative Assistance in Tax Matters - developed jointly by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010 - and that has been signed by both German and the Cayman Islands satisfies this requirement.

As the Cayman Islands is also not included on the EU Blacklist, Cayman-domiciled AIFMs can continue marketing to qualified German investors under the NPPR regime, provided they meet all other applicable conditions and follow standard notification procedures.

The Market Context

BaFin’s confirmation is vital for the continuity of global private markets. The Cayman Islands remains the leading offshore hub for investment funds, second only to the U.S. globally. More than half of global hedge fund assets by value are managed through Cayman structures. German institutional investors, in particular, frequently access U.S. and UK-managed strategies via Cayman feeder funds or parallel structures.

By confirming that the Multilateral Convention satisfy the new §330 KAGB requirements, BaFin has ensured that German professional and semi-professional investors can continue to access these global opportunities without disruption.

Conclusion and Outlook

For fund managers, this is a clear "green light." Cayman funds remain eligible for marketing in Germany’s NPPR, provided they follow standard notification procedures. However, managers should remain vigilant regarding the EU Blacklist. The eligibility under the new §330 KAGB is dynamic: if a jurisdiction is added to the EU Blacklist or fails to maintain OECD-standard agreements, marketing rights could be revoked. For now, however, the Cayman Islands has solidified its standing, and BaFin’s clarification keeps the gates open.