A law with few friends

After years of uncertainty over how private equity funds based in Germany should be taxed, the government is determined to finally deal with the issue once and for all. Over the course of the year, the Ministry of Finance has published a number of drafts of a law on the subject, the socalled Private Equity Gesetz. Still pending, the law has already achieved notoriety, and throughout the process the government’s efforts have met with fierce criticism from a range of parties.
Frustrations about the government’s most recent proposal to limit tax breaks for German private equity funds to early- stage investment funds with less than €20 million ($28 million) under management has been expressed not just by those who would suffer the most obvious set-back – general partners of funds in excess of €20 million of equity. Germany’s private equity trade association, the BVK, has described the Ministry’s stance as a “missed opportunity” in that it failed to create a framework in which the whole industry could flourish, rather than just a small section of it.
Equally critical noise has been coming from the German buy side. The Bundesverband Alternative Investments (BAI), which lobbies on behalf of institutional investors participating in private equity and other nonmainstream asset classes, published a statement in September, urging the government to throw out the draft altogether and start from scratch. In a letter to Federal Finance Minister Peer Steinbrück in September, the BAI described the pending law as “wholly inadequate” to finally bring about the kind of tax transparency that private equity funds in Germany depend upon in order to attract institutional capital. The BAI reminded Steinbrück that according to the European Private
Equity and Venture Capital Association (EVCA), Germany already had one of the least conducive legal and fiscal frameworks for private equity investment in Europe. If the Ministry’s current plans were to become law later this year, the BAI expects institutional investment in German funds to decline, despite German businesses having “a significant need for private equity funding.” Ultimately, believes the BAI, the German economy as a whole would suffer.
It seems unlikely that the BAI’s intervention can succeed. According to private equity professionals, the finance ministry’s refusal to promote later-stage private equity funds in Germany is underpinned by political quarrelling between the two parties that make up the country’s coalition government. Steinbrück’s left-of-center Social Democratic Party (SPD) is more sceptical of the benefits of financial investors operating in Germany than Chancellor Angela Merkel’s Christian Democrats (CDU).
With both parties looking to position themselves ahead of new elections, private equity, in the words of a Munich based fund manager, has become “a political football.”
This football is being kicked about frequently by the country’s senior politicians. Peter Struck, the leader of the SPD faction in the lower chamber of the German parliament, recently told journalists that in addition to the pending law on taxation, Germany needed laws to help its corporations in strategically important sectors protect themselves against the growing influence of financial investors – including private equity and hedge funds. Limiting private equity ownership of German businesses to 25 percent might be appropriate to keep out the “locusts”, Struck suggested. He also said his party was ready for a confrontation with Merkel and her party over the issue later this year.
In the meantime, the debate over private equity taxation looks set to continue. Ironically enough, the Private Equity Gesetz appears to have failed to impress even the closest allies of the SPD: Germany’s powerful trade unions. Their bone of contention is of course a very different one: IG Metall, which has more than two million members in metal-processing businesses, thinks the idea of promoting funds with up to €20 million in commitments way too generous. IGM would much rather dust off an earlier version of the law – the one in which Steinbrück and his colleagues had envisaged a limitation on tax breaks to funds with as little as €500,000.