Current tax (non-)developments in private equity and venture capital funds
The potential danger of substance taxation exists mainly in the following circumstances: a) Return of capital contributions in the case of EU corporations, b) Return of capital contributions in the case of third-country corporations, c) Distributions from investment funds within the meaning of the Investment Tax Act.
In recent years, the BZSt has developed a list of questions and criteria to be applied to all applications, which must be fulfilled in full in order for the requested return of deposits to be certified. Among other things, this requires the submission of all bank statements of all shareholders of the EU corporation as well as all resolutions of the management, etc. However, if the required evidence cannot be provided to a sufficient extent (the final assessment generally lies with the responsible officer at the BZSt), this may lead to non-recognition of the tax-neutral return of capital contributions. In this case, the distribution made from the EU corporation must be recognized as a final taxable dividend in the assessment procedure.
In the opinion of the tax authorities, a tax-free repatriation of capital contributions from corporations in third countries (e.g. USA, Cayman Islands, Channel Islands of Guernsey, Jersey or Hong Kong) should generally be permitted. not be possible. Instead, all payouts from these third-country corporations, i.e. also capital repayments, are to be qualified as taxable profit distributions.
With the introduction of the Investment Tax Act (Investmentsteuergesetz n.F.) as of 2018, all capital investment companies as defined in Section 19 InvStG a.F. are to be classified as investment funds as defined in the InvStG n.F. according to the wording of the law. However, individual tax offices or state offices are of the opinion that corporations only qualify as investment funds if they meet certain criteria of the German Investment Code (Kapitalanlagegesetzbuch, KAGB).
For some years now, investors have been trying to counter the risks of taxation of the capital invested by concluding appropriate agreements in “side letters” with the respective private equity fund. For example, by selling the blocking corporations. However, since the sale of a HoldCo is often ruled out in practice, the instrument of share redemption has become established in the market. Due to continuing uncertainties regarding the recognition of a tax-neutral return of contributions, German investors in side letters in particular are pushing for the implementation of corresponding structures in order to avoid harmful taxation of assets. Insofar as such structural peculiarities are negotiated, the notification obligation pursuant to the law on the introduction of a duty to notify cross-border tax arrangements (“DAC 6”), which came into force on January 1, 2020, should subsequently also be observed. In these cases, the structural advisors of the German investors negotiating the relevant side letters are required to report, as are the German investors themselves.
In addition to the numerous tax issues and problems, in which the tax authorities persistently stick to their incorrect interpretation of the law and refuse to develop the law further, they, the tax authorities, together with the legislator, are unnecessarily opening up new playing fields elsewhere. Without necessity, a practice that has been well established for years is being abandoned and turned upside down.
These include VAT on management fees, the capitalization or non-capitalization of fund establishment costs, and the questioning of asset-managing fund structures. With regard to fund structures, for example, we have recently noticed an increasing tendency on the part of tax auditors to “push” even (German) structures that clearly and indisputably qualify as asset management according to the criteria of the fund decree into the “commercial corner”.
About Dr. Christoph Ludwig
Christoph Ludwig joined BLL directly after his studies in business administration and his time as an assistant along with his doctorate at the Ludwig Maximilian University in Munich, where he has been a partner since 1998. He specializes in the ongoing management of national and international private equity and venture capital funds and in providing comprehensive advice to wealthy (private) individuals with an entrepreneurial background. The range of services in the private equity sector includes the preparation of annual financial statements and tax returns for domestic structures as well as comprehensive and complete separate and uniform declarations for domestic shareholders of foreign private equity funds, including any AStG declarations.