Inheritance tax aspects in the valuation of private equity funds

Back in 2017, we poin­ted out the first tax pecu­lia­ri­ties in the valua­tion of private equity invest­ments in the context of inhe­ri­tance tax. Since then, the topic has become more topi­cal than ever. Despite the demons­tra­bly growing importance of this form of invest­ment in Germany and abroad, there is still a lack of speci­fic tax regu­la­ti­ons for its valua­tion in the case of inhe­ri­tance and gifts. As a result, gene­ral valua­tion prin­ci­ples have to be applied to a special and complex structure. 

The valua­tion of shares in private equity funds for inhe­ri­tance tax purpo­ses is based on the gene­ral valua­tion prin­ci­ples for asset-mana­ging and commer­cial part­ner­ships. As there are curr­ently no special statu­tory regu­la­ti­ons for the valua­tion of such parti­ci­pa­ti­ons, the gene­ral regu­la­ti­ons are applied. — Both the value of the trans­fer­red assets and the conside­ra­tion of any estate liabi­li­ties are deter­mi­ned on the basis of the fair market value — i.e. the price that would be achie­ved in the ordi­nary course of busi­ness in the event of a sale. This value forms the basis for the tax assess­ment in the context of inhe­ri­tance tax. 

Private equity funds are play­ing an incre­asingly important role world­wide as drivers of invest­ments in compa­nies. These funds, both dome­stic and foreign, are gene­rally orga­ni­zed as part­ner­ships, with the inves­tors acting as part­ners with limi­ted liabi­lity. Nevert­hel­ess, there is no speci­fic metho­do­logy for the valua­tion of private equity funds in inhe­ri­tance tax and valua­tion law, which is why the valua­tion of asset-mana­ging and commer­cial part­ner­ships must be used. The start­ing point for the valua­tion is the NAV deter­mi­ned and commu­ni­ca­ted by the fund manage­ment, from which, howe­ver, various deduc­tions should be made in our opinion. These discounts result, among other things, from fixed manage­ment fees and the carried inte­rest recei­ved by the sponsors. 

The part­ner­ship agree­ments of private equity funds gene­rally stipu­late that the trans­fer of a fund share requi­res the writ­ten consent of the gene­ral part­ner. The gene­ral part­ner often has an unrest­ric­ted right of refu­sal vis-à-vis poten­tial purcha­sers. In this way, the mana­gers behind the gene­ral part­ner ensure the homo­gen­eity, stabi­lity and exclu­si­vity of their fund. 

In prac­tice, this consent clause has a signi­fi­cant value-redu­cing effect, as a sale to an exter­nal buyer always depends on the appr­oval of the gene­ral part­ner — and the gene­ral part­ner usually has no over­ri­ding inte­rest in a change of share­hol­der. Often, only inves­tors who are alre­ady known and conside­red relia­ble are appro­ved. If the gene­ral part­ner grants his appr­oval, it is in his own inte­rest that the fund share is taken over by a finan­ci­ally strong and long-term orien­ted succes­sor inves­tor. In this context, specia­li­zed inter­me­dia­ries and consul­tants for fund­rai­sing and secon­dary tran­sac­tions are incre­asingly involved. 

Dr. Chris­toph Ludwig joined BLL directly after study­ing busi­ness admi­nis­tra­tion and comple­ting his assistant­ship and docto­rate at the Ludwig Maxi­mi­lian Univer­sity in Munich, where he has been a part­ner since 1998. Chris­toph Ludwig 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. — www.bllmuc.de