The trend alre­ady outlined by me in the FYB Finan­cial Year­book 2010, namely that the tax autho­ri­ties are incre­asingly approa­ching indi­vi­dual German inves­tors and reques­t­ing them to submit a sepa­rate and uniform decla­ra­tory state­ment, has acce­le­ra­ted. In our daily consul­ting prac­tice, we have noti­ced a considera­ble increase in such requests, in which the tax autho­ri­ties have also star­ted to inform the inves­tor about the other German inves­tors known to the tax autho­ri­ties and to request the submis­sion of a joint tax returnwith refe­rence to the rele­vant legal provi­si­ons in the German Tax Code.

Dome­stic inves­tors gene­rally show an increased inte­rest in syste­ma­ti­cally working through this issue, as there have been repea­ted cases of quali­fi­ca­tion conflicts in various foreign private equity funds in recent times, in which private inves­tors have clas­si­fied the income as asset manage­ment income, while insti­tu­tio­nal inves­tors (some­ti­mes in paral­lel) have trea­ted this income as busi­ness income due to diver­ging tax interests.

The coor­di­na­tion process between the various dome­stic inves­tors is time-consum­ing and in some cases also labo­rious, since this conflict of inte­rest is in the nature of the diffe­rent tax objec­ti­ves, the inves­tors may only learn about each other many years after the closing of the fund and the first tax return filed, and the various inves­tor groups are reluc­tant to deviate from their own quali­fi­ca­ti­ons (which are some­ti­mes also supported by corre­spon­ding expert opini­ons). — The royal road out of this quali­fi­ca­tion dilemma remains the commis­sio­ning of the prepa­ra­tion of the tax return for the German deter­mi­na­tion parti­ci­pants by the manage­ment team of the foreign private equity fund, as this avoids the coor­di­na­tion and recon­ci­lia­tion problems descri­bed above.

Due to the further BMF letter issued in spring 2010 on the report­ing obli­ga­tion of foreign share­hol­dings, we had dealt inten­si­vely with the effects and the problems in the prac­ti­cal imple­men­ta­tion for private equity compa­nies in the FYB Finan­cial Year­book 2011. At the same time, we cont­ac­ted the highest autho­ri­ties of the fede­ral and state tax autho­ri­ties in order to work out viable solu­ti­ons for the report­ing obli­ga­ti­ons of foreign share­hol­dings, in parti­cu­lar for the private equity indus­try, and to define these solu­ti­ons toge­ther with the tax authorities.

In the course of lively and inter­de­part­mental discus­sions, initial partial succes­ses have been achie­ved so far, at least at the Bava­rian level, since, on the initia­tive of the Bava­rian Minis­try of Finance, the report­ing dead­line for foreign share­hol­dings in the draft Tax Simpli­fi­ca­tion Act 2011 was not to end until five months after the end of the calen­dar year in which the repor­ta­ble event occur­red. It was lear­ned from govern­ment circles that the undis­pu­ted parts of this legis­la­tive package are to be codi­fied by the end of the year.

In addi­tion, a number of key points have still not been clari­fied, with regard to which we have now approa­ched Mr. Fahren­schon, the Bava­rian Minis­ter of Finance, directly for further coor­di­na­tion and clari­fi­ca­tion. Fahren­schon is known as a commit­ted supporter of the private equity indus­try. We assume that this topic will be taken up again after the poli­ti­cal summer break and that we will hopefully be able to present a prac­ti­ca­ble report­ing system in the near future.

With FATCA (Foreign Account Tax Compli­ance Act), the US tax autho­rity IRS (Inter­nal Reve­nue Service) inter­venes directly in all tran­sac­tions with US sources. Accor­din­gly, in the future, among other things, all private equity funds that receive returns from U.S. sources must regis­ter with the IRS or enter into a “contract” with the IRS and report the U.S. persons invol­ved as well as certain rela­ted data or submit a corre­spon­ding nega­tive decla­ra­tion. Other­wise, a 30% penalty tax will be with­held on reflows (i.e. not only income, but now also sales proceeds in addi­tion to inte­rest and divi­dends) from the USA. Accor­ding to current know­ledge, this “penalty with­hol­ding tax” cannot be refun­ded even after the fact. In this respect, there would then be a defi­ni­tive taxa­tion, which would affect all share­hol­ders of the respec­tive private equity fund, regard­less of whether US taxpay­ers are invol­ved or not. — Regar­ding details of regu­la­tion and in parti­cu­lar the requi­re­ments to avoid puni­tive taxa­tion, I refer to the rele­vant article in the upco­ming FYB Finan­cial Year­book 2012.