GERMANY Law and Practice Contributed by: Amos Veith, Jens Steinmüller, Ronald Buge and Stephan Schade, POELLATH
Domestic funds eligible for non-trading treatment Partnership-type funds are treated as transpar - ent for German tax purposes. Therefore, taxable income allocated to the investors is subject to tax at its level and in accordance with its tax sta - tus, regardless of whether or not the fund made distributions. Resident corporate investors 95% of a resident corporate investor’s allocable share of equity capital gains is exempt from tax; the remaining 5% and all other items of income (interest and dividends) are subject to German corporate income tax and trade tax. The 95% exemption does not apply to life and healthcare insurance companies. Non-resident corporate investors A non-resident corporate investor’s allocable share of German equity capital gains is exempt from German tax. Dividends received from Ger - man portfolio companies and payments on cer - tain profit-linked debt instruments by German issuers are subject to German withholding tax at the rate of approximately 26.4%. Tax treaty- protected investors may file an application with the German federal tax office for a refund of German withholding tax under the applicable tax treaty. Income derived from non-German portfolio companies is not taxable in Germany for non-resident corporate investors. Domestic funds eligible for trading treatment Fund that are trading partnerships are treated as transparent for German income and corporation tax purposes as well. However, they are subject to German trade tax as and of themselves. Resident corporate investors The taxation of resident corporate investors in trading fund partnerships is, in principle, simi -
income tax rate of the carried interest partici - pant. According to German fiscal authorities, carried interest payments by funds that are treated as trading are fully subject to tax at the marginal income tax rate of the carried interest partici - pant. According to a decision rendered by the German federal tax court in December 2018, carried interest payments by funds that are treat - ed as trading are subject to tax in accordance with the tax rules applicable to the source from which the carried interest payments are derived. It is an open issue whether this favourable court decision will be generally applied by the German fiscal authorities. In April 2024 the German federal tax court held that these principles also apply to non-trading fund partnerships. However, as there are spe - cific provisions on requalification and partial exemption of carried interest payments at the level of the carried interest participant, this is only relevant at partnership level. This has an impact on investors because carried interest can no longer be treated as expense at partnership level (which might be non-deductible in certain scenarios) but as (disproportional) allocation of income which reduces the income of the inves - tors. The German tax authorities have not yet decided whether they are willing to apply the principles laid down in this decision generally. Carried interest payments are not subject to VAT. Taxation of Investors of Domestic and International Partnership-Type Funds The following description is limited to funds organised as partnerships.
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