AIFMD in Germany: what about tax? New Developments

On 30 January, the German government approved proposed revisions to the German Investment Tax Act (the New Draft), the primary tax legislation applicable to manyfunds. We informed you about the draft proposal issued in early December 2012 in our PE Tax Alert (the December Draft).

The New Draft contains substantial improvements to the December Draft. Under the December Draft, German tax resident investors in corporate fund structures would have been taxed [annually] on the basis of any increase in the value of the fund interests held (for details see our PE Tax Alert at this link). Such a dry tax charge would have had disastrous effects for German investors in those funds if it had been implemented, and could accordingly have caused them not to invest in such funds or, if already invested, to exit such funds. Clearly this was designed as an attack on jurisdictions offering tax exempt corporate fund vehicles such as Luxembourg or Ireland. Fortunately the government has revisited this proposal and the New Draft no longer contains this provision.

In the following we would like to summarise briefly the key implications of the New Draft for private equity and similar funds.

Partnership funds

As was the case in the December Draft, the New Draft proposes to treat partnership structures in accordance with the general German taxation rules for partnerships. Effectively, no changes are expected to the current position.

Unfortunately, Germany, unlike other countries, does not propose to use the AIFMD transposition to improve the environment for funds in Germany, as it is not proposing to introduce a market standard competitive fund taxation regime for such funds. Funds in Germany will, in particular, still need to focus on complying with the administrative practice contained in the criteria for limited partnership funds in order to be treated as non-trading.

Corporate funds

The New Draft now proposes to treat German tax resident investors in such funds effectively like shareholders in ordinary corporations. However, two notable aspects remain:

· It is still proposed to grant the German participation exemption on dividends distributed by the respective fund (currently 95% corporate tax exemption for corporations and 40% tax exemption for individuals holding the fund interests as business assets) only insofar as the investor can provide evidence that the fund is subject to a general corporation tax without being exempt. In cases where the fund is domiciled outside the EU/EEA the fund must be subject to corporate taxation of at least 15%. German tax resident individuals holding the fund interests as private assets would benefit from the German flat tax regime on dividends in any case.

· The New Draft defines corporate fund structures as all funds which are not partnerships. Effectively, this means that fund structures such as the French FCPR or an Italian fondo chiuso are treated as corporate bodies for German tax purposes under the Government Draft. This was already proposed in the December Draft. We should stress that this approach is not completely in line with the various tax treaties that Germany has concluded in the past.

We will keep you informed about further developments.

Christian Schatz
Partner
Funds
Munich
T: +49 (0)89 89 0 81 0
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Sonya Pauls
Partner
Funds
Munich
T: +49 (0)89 89 0 81 0
View online profile