German listed PE suffers tax setback

Listed private equity vehicles could become less attractive to German investors following a decision by the German government to reintroduce a “dry tax” (a tax on illiquid earnings) provision under its draft Investment Tax Act.

Under the proposal investors in corporate fund structures, a typical vehicle for German listed private equity firms such as Deutsche Beteiligungs, would be taxed on distributions made by the fund, as well as an annual charge on any increase in the fund's net asset value (NAV).

Proponents of the measure argue that the dry tax would prevent tax abuse. Munich-based Dechert partner Hans Stamm explains the vehicles could allow income to be retained and re-invested at the fund-level, allowing investors to avoid any taxes on a corporate fund structure that appreciated in value until distributions were made. 

Investors in listed German corporate fund structures could expect at minimum a six percent annual tax on increases to NAV under the proposal, according to Stamm. 

In February, PE Manager reported the German government had scrapped the proposal following much criticism from industry opponents. 

At the time Christian Schatz, Munich-based partner at SJ Berwin, told PEM the dry tax was a blatant attack on jurisdictions offering tax exempt corporate structures, such as Luxembourg and Ireland, but would have negative spillover effects on Germany's own private equity markets.