German tax act gives LPs exemption rate of 80%

Oscar Geen
12 February 2018

Tweet
Facebook
LinkedIn
Google plus
Send to

The German Investment Tax Act, passed in 2016, has entered into force as of 1 January 2018 resulting in a partial exemption of 80% for some LPs.

German corporate investors in equity funds (which invest at least 51% of their value in equity participations) will be eligible for the partial exemption.

The new rules apply to German and international funds treated as corporate taxpayers, they will not apply to partnership funds.

Peter Bujotzek, a partner at German law firm P+P Pöllath + Partners who specialises in investment-related tax and regulation, said it is of high practical importance for corporations and contractual funds: "Depending on the investment strategy of an alternative investment fund (AIF) and its investor base, the new German Investment Tax Act may result in an attractive overall tax rate, as well as a reduced tax compliance burden, in particular for German private individuals."

Additionally, Bujotzek envisages that it could broaden the scope of usage for corporate AIFs: "Given that distributions by a German corporate AIF are not subject to German withholding tax, such German corporate AIFs could be used, for instance, as feeder or fund-of-funds vehicles for international investors, in particular if the master funds do not invest in Germany."

A client communication sent out by the law firm predicts that managers of international private equity funds can expect requests from German investors for additional information on the instruments held by their funds each year. This is because the burden of proof that the 51% threshold has been fulfilled rests with the German investors.

P+P has provided advice to a number of private equity funds across DACH, France, the UK and the Nordic and CEE regions in recent years, according to Unquote Data. In 2017, it advised Afinum Management on the formation of its €400m buyout fund Afinum Achte Beteiligungsgesellschaft, as well as UK-based Stirling Square's fourth buyout fund, targeting €1bn.