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German tax

Structuring a pan-European private equity fund is already hard enough, so the tax shenanigans in Germany in recent years have been an unwelcome headache for funds with German teams, or German investors, says SJ Berwin.

Perhaps the biggest problem has been the uncertainty, and initiatives from the German tax authorities designed to clarify the situation have frequently added to the complexity. But last month there was a development which should make life a bit easier.

One of the problems stems from a German law regulating foreign investment funds. In summary, that says that a penal tax regime will apply for German investors into certain types of non-German funds.

There are some ways to ensure that the non-German fund does not fall into the category that gives rise to these adverse tax consequences, but these have been cumbersome in practice and do not always work. As a result, German investors have often needed a lot of comfort through detailed side letters, or even parallel German structures to invest alongside the main fund.

But in June, after much lobbying and long discussions, the federal tax authorities issued some guidance that should make a big difference to European funds that are currently looking at the structure for their next fund. In essence, most foreign private equity funds - although, notably, not hedge funds - will now fall outside the rule that causes the difficulties.

That should clear the way for German limited partners to invest into a non-German limited partnership, and for German fund managers to use international structures for their own funds. Naturally, one or two points of uncertainty do remain, even after the June announcement, but these are much less significant than previously.

Germany's tax problems stem, in part, from a lack of understanding by the tax authorities of the private equity industry - something which the industry association has been trying hard to correct. But perhaps the bigger problem - and one that is familiar to many other European tax practitioners - is a tendency to write very wide-ranging laws and then leave it to the taxman to interpret them, and - when pressed - to mitigate their unintended effects.

SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact André Gloede in our Munich office (andre.gloede@sjberwin.com) or visit our website at www.sjberwin.com