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.