(Denied) tax neutrality of capital repayments
(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.
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. -
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.