GERMANY Law and Practice Contributed by: Tarek Mardini, Antonia Puglisi and Enzo Biagi, POELLATH
Non-German Investors In general, non-resident investors of a fund structured as a partnership will be subject to taxes in Germany pursuant to the German general tax rules for non- residents. If the fund is structured as a partnership having asset management status (ie, it is not deemed to be in busi - ness and is not engaged in business activities for Ger - man tax purposes), non-resident investors are gener - ally (if they hold less than a 1% indirect share in such portfolio company) not taxed on capital gains realised by the fund from the sale of a portfolio company and they are not required to file tax returns in Germany. However, the income of non-resident investors may be subject to German withholding tax (eg, with regard to dividend distributions from a portfolio corporation held by the fund). A refund, an exemption or a reduc - tion of withholding tax may depend on certain filing procedures. This may also apply with regard to certain double taxation treaties. If the fund is structured as a partnership having a trade or business status, non-resident investors are gener - ally subject to limited tax liability on the proportionate income from such trade or business allocated to such investors, to the extent that it is attributed to a perma - nent establishment of the fund in Germany. In such a case, a foreign investor would also be obliged to file a personal tax return statement in Germany. 4.9 Double Tax Treaties Germany has a vast network of double-tax treaties with a large number of countries (including most OECD states and many other states). The applicabil - ity of such double-tax treaties will depend on the legal form of the fund in question. Most German alternative funds are structured as partnerships. As such, they are tax transparent. As a result, double-tax treaties typically do not apply directly to a fund, but rather to the investors (ie, the partners of the partnership). One of the main issues with income received from a German alternative fund is whether the activities of the fund qualify as a trade or business that is related to a permanent establishment in Germany. No special exemptions exist for funds in this regard in German domestic laws (unlike in Luxembourg).
gate, effectively around 26.5%) if the fund qualifies for treatment as private asset management (and provided further that (i) in the case of capital gains, such inves - tor holds less than a 1% indirect shareholding in the target company; and (ii) in the case of income from interest, such investor holds less than a 10% indirect shareholding in the target company). For individuals that principally hold their fund interests as part of their business assets, the full amount of such items is subject to income tax at their personal rate (up to 45%). The same would be true for individuals (irrespective of whether they hold their investment fund interests as part of their non-business assets or business assets), if the fund is engaged in a trade or business. The partial income tax regime (40% of income is exempt) would apply to capital gains and dividends. The full tax rate is applicable to interest income. In certain cases, trade tax paid at the level of the fund is (par - tially) refundable at the level of the respective investor. Corporate investors For corporate investors, both corporate income tax (ie, the German corporate tax rate, generally 15% if no exemptions apply) as well as (potentially) trade tax (the trade tax rate will depend on the tax residency of the corporate investor, as the trade tax rate differs based on municipality, but typically the general tax rate is around 15–18%, if no exemption applies) are applicable at their level, if such corporate investor is not tax-exempt. For corporate taxable investors, the general rule is that the full amount of such items is subject to corporation tax. In addition, German trade tax may be triggered (in particular, if the fund is treated as private asset management). For certain corporate investors (in particular, property insurance compa - nies as well as general corporate entities), the partial income taxation and the exemption pursuant to Sec - tion 8b of the German Corporation Tax Act may be applicable to both corporate tax as well as trade tax. In particular, this applies in the case of capital gains as well as dividends (in the latter case, only if certain holding percentages are satisfied – 10% in the case of corporate tax applicable to dividends and 15% in the case of trade tax applicable to dividends).
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