GERMANY Law and Practice Contributed by: Amos Veith, Jens Steinmüller, Ronald Buge and Stephan Schade, POELLATH
However, the administrative pronouncement has been questioned by the courts and the tax authorities of some federal states seemed to have changed their view on the administra - tive pronouncement and interpret some of the requirements in a more narrow manner. For this reason, and to avoid some of the restrictions associated with the requirements, certain fund managers tend to set up funds that are treated as trading partnerships. As of 2024, management of private equity and venture capital funds by German managers is no longer subject to VAT in Germany. Allocations and distributions to investors Funds structured as partnerships are treated as transparent for German tax purposes, so taxable income allocated to the investors is subject to tax regardless of whether or not the fund made distributions. Non-resident investors of funds that are eligible for non-trading treatment are generally not subject to a German tax filing obli - gation in respect of their allocable share of the fund’s taxable profit while non-resident investors of a trading fund must file a tax return in Ger - many. To handle this, some investors interpose holding companies that are opaque for German tax purposes or use corporate (opaque) feeder structures. Regardless of whether the fund is a trading or non-trading partnership, the fund files a part - nership return showing the items of taxable income received by the fund partnership and each investor’s allocable share thereof. In case of a non-trading fund partnership, non-resident investors are included in the partnership return only for information purposes. They are subject to tax in their country of residence in accord - ance with their personal tax status. In case of a trading fund partnership the income of non-res -
ident investors will be determined based on the partnership return. The income so determined is binding for the tax assessment procedure of the non-resident investors. Distributions by the fund to investors are not subject to German withholding tax. Dividends received by the fund from German portfolio companies as well as payments by German portfolio companies on certain German-source profit-linked debt instruments (such as silent partnership interests, jouissance rights and profit-sharing loans) are subject to withholding tax at the rate of approximately 26.4% (includ - ing solidarity surcharge) at source. Generally, the withholding agent (German portfolio companies or a German issuer of a profit-linked debt instru - ment) is not permitted to apply a reduced rate of withholding (eg, under an applicable tax treaty). Non-German investors that are entitled to treaty benefits with respect to such items of income must file a refund application with the German federal tax office, which is awarded subject to the fulfilment of certain procedural requirements. However, in case of a trading fund partnership the German withholding tax can be credited against the German tax liability of a non-resident investor and an exceeding amount (if any) will be The German fiscal authorities characterise car - ried interest payments as a compensation for professional services, and carried interest pay - ments are not taxed in accordance with the rules applicable to the source from which such pay - ments are derived. Carried interest payments by private equity funds and venture capital funds that are eligible for non-trading treatment are eli - gible for a partial tax exemption of 40%, and the remaining 60% is subject to tax at the marginal refunded upon tax assessment. Carried interest participants
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