German tax victory for listed PE

The German government has rowed back on its plans to apply a “dry tax” (a tax on illiquid earnings) on corporate fund structures in its latest draft tax legislation.

The original proposal called for investors in corporate fund structures, a typical vehicle for German listed private equity firms such as Deutsche Beteiligungs, to be subject to a tax on the basis of a stock market price increase as well as on the basis of distributions.

Under the initial draft, the first to suffer would be listed private equity funds as their investors would have been hit by the taxation on basis of a value increase, Christian Schatz, Munich-based partner at SJ Berwin, told PE Manager.

The measure was a blatant attack on jurisdictions offering tax exempt corporate structures, such as Luxembourg and Ireland, but clearly would have caused a massive collateral damage also in Germany said Schatz.

“When you look at the government draft for corporate fund structures now this is a big step forward from the initial draft. I’m pretty happy to see them take out this taxation based on an increase in value,” he added.

However the latest draft does not change the way partnership structures will be treated in Germany. So unlike other countries Germany will not the use the updates to its tax code to improve the environment for funds, said Schatz.

Current German tax law distinguishes between trading and non-trading limited partnerships. It was hoped that Germany would introduce a market standard fund taxation regime, as trading limited partnerships create a permanent establishment in Germany causing foreign investors to be taxed as German residents. 

Funds in Germany will need to continue to focus on complying with the administrative practice required to be treated as non-trading, according to a client alert from SJ Berwin. 

The draft legislation will now go to the German parliament which is expected to pass the draft into law quickly so the new rules apply before the 22 July – the Alternative Investment Fund Managers Directive (AIFM) go-live date.

The amendment to the tax law is required in order to ensure conformity with Germany’s AIFM implementation legislation that went before parliament at the end of last year.