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GERMANY - Tax reform could increase risk of insolvency

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According to a front-page report in German financial newspaper Handelsblatt, the German corporate tax reform could seriously worsen conditions for private equity groups operating in the country. Peer Steinbrück's move to abolish tax relief on corporate interest payments would represent a damaging blow to private equity's leverage-based model, says the newspaper.

The report quotes Clifford Chance's private equity specialist Oliver Felsenstein, saying, 'A mode of taxation such as this would unbalance private equity's entire model. I wouldn't rule out the possibility of insolvencies either.' An anonymous financial investor estimated that the taxation plans could reduce investment returns by as much as 4%. Jochen König, managing director of leveraged finance at the Royal Bank of Scotland points out that current investments would also be affected should the new measure come into effect. Nevertheless, according to a finance ministry representative, no decision has been taken on the tax reform as yet.
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