3 questions to smart minds

(Denied) tax neutrality of capital repayments

For this 3 questions to Dr. Christoph Ludwig

BLL Braun Leber­fin­ger Ludwig, Munich
Photo: Dr. Chris­toph Ludwig
19. Febru­ary 2019

In recent years, the taxa­tion of private equity funds and of the share­hol­ders of private equity funds who are liable to tax in Germany has incre­asingly become the focus of the tax autho­ri­ties. In the area of tax audi­ting, specia­li­zed teams have been set up with corre­spon­ding person­nel rein­force­ments, which are inten­si­vely trai­ned by more expe­ri­en­ced audi­tors with regard to the special features of private equity struc­tures. — Howe­ver, tax advi­sors have recently also been confron­ted more and more with extreme posi­ti­ons on the part of the tax authorities.

For this 3 ques­ti­ons to Dr. Chris­toph Ludwig, tax advi­sor and part­ner at BLL Braun Leber­fin­ger Ludwig, Munich

1. Does the tax clas­si­fi­ca­tion of capi­tal repay­ments conceal the intro­duc­tion of taxa­tion on assets? How is the return of capi­tal contri­bu­ti­ons curr­ently trea­ted for tax purposes?

(dome­stic and foreign) Private equity funds gene­rally invest in dome­stic and foreign corpo­ra­ti­ons. In the case of payments made by these corpo­ra­ti­ons to the dome­stic or foreign private equity fund, a strict distinc­tion must be made between (taxa­ble) profit distri­bu­ti­ons and capi­tal repay­ments. The repay­ment of equity capi­tal (nomi­nal capi­tal or capi­tal reser­ves) of a corpo­ra­tion should (should) in prin­ci­ple not be taxable.

The system of return of capi­tal contri­bu­ti­ons for tax purpo­ses is based on the 24 statu­tory provi­si­ons of the German Corpo­ra­tion Tax Act (Körper­schaft­steu­er­ge­setz — KStG) for a A) German corpo­ra­tion, which results in corre­spon­ding (also statu­tory) obli­ga­ti­ons to provide evidence for B ) EU corpo­ra­ti­ons, which in turn the tax autho­ri­ties do not consider appli­ca­ble to C) third-coun­try corpo­ra­ti­ons.

Extreme posi­ti­ons on the part of the tax autho­ri­ties which, irre­spec­tive of the comple­xity of the struc­tures of private equity funds, empha­size purely formal aspects in order to obtain an exten­sion of taxa­tion, hardly pose any solva­ble requi­re­ments. Although this is the funda­men­tal task of the tax audit, trends are emer­ging in this regard,
1) to obtain evidence from the taxpay­ers , which usually cannot be provi­ded due to the parti­ci­pa­tion struc­tures (and the tax admi­nis­tra­tion is aware of this or at least should be aware of it) and
2) inter­pret exis­ting legal regu­la­ti­ons, in parti­cu­lar for foreign matters, in such a way (by analogy) that this neces­s­a­rily results in (possi­bly double) taxa­tion of the subs­tance.

2. What is the status quo regar­ding the tax depo­sit account regime for EU corporations?

The sepa­rate deter­mi­na­tion of the return of capi­tal contri­bu­ti­ons for EU corpo­ra­ti­ons is gover­ned by Sec. 27 (8) KStG. The deter­mi­na­tion must be made by apply­ing the provi­si­ons for German corpo­ra­ti­ons muta­tis mutan­dis. Accor­din­gly, the distri­bu­ting EU corpo­ra­tion must submit the appli­ca­tion for the deter­mi­na­tion of the return of capi­tal contri­bu­ti­ons to the Fede­ral Central Tax Office (“BZSt”) within one year after the end of the calen­dar year in which the payment was made (cut-off period!). As a conse­quence, payouts that are not certi­fied as a return of capi­tal contri­bu­ti­ons are deemed to be taxa­ble dividends. -

3. What is the outlook for expec­ted further tax developments?

The incre­asing aware­ness of foreign private equity fund mana­gers by dome­stic inves­tors, but in parti­cu­lar also the tigh­tened report­ing requi­re­ments for foreign holdings, lead to the remai­ning gaps regar­ding the prepa­ra­tion of joint tax returns of dome­stic assess­ment parti­ci­pants in foreign private equity funds being closed more and more over time.

Signi­fi­cant diffi­cul­ties and obsta­cles still exist in connec­tion with appli­ca­ti­ons to estab­lish resti­tu­tion of invent­ories. Be it in the case of German corpo­ra­ti­ons the only unila­te­rally provi­ded adjus­t­ment in favor of the treasury, for exam­ple. after a tax audit or for EU corpo­ra­ti­ons, the docu­ments and evidence unkno­wingly (or even willingly?) reques­ted by the tax autho­ri­ties even for the target compa­nies of private equity struc­tures, in some cases hardly or almost impos­si­ble to provide.

At present, howe­ver, the stub­born atti­tude of the tax autho­ri­ties in connec­tion with the resti­tu­tion of depo­sits from third-coun­try corpo­ra­ti­ons is parti­cu­larly serious. This intran­si­gent atti­tude of the tax autho­ri­ties is almost impos­si­ble to explain to dome­stic inves­tors, and the econo­mic conse­quen­ces in the form of the some­ti­mes immense tax arre­ars payments plus the tax on the income of the taxpay­ers are almost inex­pli­ca­ble. of the statu­tory inte­rest on this back tax claim are enormous.

Subscribe newsletter

Here you can read about the latest transactions, IPOs, private equity deals and venture capital investments, who has raised a new fund, how Buy & Build activities are going.

Get in touch

Contact us!
fyb [at]