Tax lawyers and venture capitalists in Germany are fighting plans that they say could hamper private equity investment.
Lawyers at local firm Haarmann, Hemmelrath & Partner said an internal ruling by the Federal Finance Administration on May 30 has created uncertainty in the market.
The authorities decided to start treating returns from private equity investment funds as business income, where the private equity partnership holds more than 25% of shares of a company. Previously, such participation was tax exempt.
The business income of individual German investors in venture capital funds would be taxed at the German income tax rate, with the higher level being around 50%. This would result in less money available to be returned to private equity investors, making such investments less attractive.
Hartmut Krause, an Allen & Overy partner in Frankfurt, said: "Any such move to treat the returns as business income for tax purposes would be a heavy hit to already battered equity funds, making exiting from equity ventures more difficult because of the tax penalty."
Next year's planned tax exemptions for such capital gains by corporate investors will not apply to individuals' income, which will be around 25% for such capital gains.
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Udo Henkel |
Udo Henkel, a Haarmann Hemmelrath tax partner, said the Federal Ministry held hearings to decide whether to publish the internal ruling. It decided against publication after lobbying from venture capitalists and tax lawyers, but the ruling has yet to be overturned. Some regional finance authorities are calling for clarification, but the tax situation will remain uncertain until the internal ruling is formally overturned.
The internal ruling could also create difficulties for leveraged acquisitions because the ruling suggests that when an acquisition is financed partly by debt — as may be the case in a management buy-out — the equity shares would be subject to the business tax.
