GERMANY Law and Practice Contributed by: Amos Veith, Jens Steinmüller, Ronald Buge and Stephan Schade, POELLATH
2.6 Tax Regime The tax regime applicable to fund structures depends on whether a fund is organised as a corporate entity or a partnership. Funds Organised as Partnerships The tax regime applicable to funds organised as partnerships is as follows. Fund structures Consistent with international standards, German funds are typically structured as partnerships that are eligible for non-trading treatment and avoid their investment activities constituting a trade or business attributable to a permanent establishment. The non-trading requirements for private equity and venture capital funds are set out in an administrative pronouncement and include the following: • no borrowings and guarantees on fund level (other than fund finance, as described in 2.5 Fund Finance ); • no reinvestment of proceeds, subject to two exceptions: (a) proceeds up to an amount previously drawn down to fund management fees and fund expenses can be reinvested to ensure that an amount representing 100% of the total capital commitments can be invested in portfolio companies; and (b) an additional amount not exceeding 20% of the total capital commitments can be reinvested to fund follow-on investments; • a weighted average holding period of invest - ments of at least three years; and • no involvement in the operating management of portfolio companies whereby representa - tion on the supervisory or advisory board of portfolio companies in a non-executive, monitoring capacity is permitted.
agreement in the event of default. Assets and investments held by the fund are typically not pledged as collateral. Common Issues in Relation to Fund Finance Common issues include the following: • financial covenants regarding excused inves - tors in respect of an investment by reference to the number of excused investors and the total amount; and • default situations pending at the time of a drawdown under the facility agreement by reference to the number of defaulting inves - tors and the total amount. Investors typically object to the requirement to provide financial information unless publicly accessible. Because of the general restriction on providing guarantees and other forms of collateral for the indebtedness of portfolio companies, equity commitment letters are very often used as an alternative. They should not interfere with the general restrictions on providing guarantees if structured as an agreement between the fund and its portfolio company whereby the fund undertakes to provide additional capital in the event that the portfolio company is in payment default or in breach of financial covenants. Such undertaking, however, should not be pledged by the portfolio company in favour of its creditors, in order to avoid being treated as a guarantee of the fund. The portfolio company can undertake in the agreement with its creditors not to change, amend or waive the fund’s equity commitment letter other than with the consent of its creditors.
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