Inheritance tax aspects in the valuation of private equity funds

For more than 29 years now, our law firm has been deal­ing with a wide range of tax compli­ance issues for private equity funds and their (German) share­hol­ders. In recent years, we have regu­larly reviewed income tax issues in the FYB Finan­cial Year­book. These included, for exam­ple, income quali­fi­ca­tion for private equity and venture capi­tal funds as well as the tax treat­ment of carried inte­rest both for the carry holders and at the level of the private equity fund. We also addres­sed the issue of VAT on manage­ment fees. Another key topic was the (manda­tory) tax neutra­lity of capi­tal repay­ments from EU and non-EU capi­tal compa­nies. We exami­ned these areas and their respec­tive chan­ging deve­lo­p­ments in recent years and — where neces­sary — also criti­cally asses­sed them. 

In this year’s article, we take a detour into inhe­ri­tance tax law and (once again) look at inhe­ri­tance tax aspects in the valua­tion of private equity funds.

Inhe­ri­tance tax valua­tion of private equity fund shares is incre­asingly coming into focus because the first gene­ra­tion of inves­tors is trans­fer­ring their invest­ments and the legis­la­tor does not stipu­late any special rules for this. In prac­tice, the start­ing point is usually the NAV deter­mi­ned by the fund manage­ment, which, howe­ver, has to be adjus­ted for fund and contract-rela­­ted factors such as carried inte­rest, ongo­ing manage­ment fees, limi­ted trans­fera­bi­lity, illi­qui­dity on the secon­dary market and the manage­men­t’s scope for valua­tion in order to arrive at a reali­stic fair value for inhe­ri­tance and gift cases.