GERMANY Law and Practice Contributed by: Carsten Berrar, Florian Späth and Heiko Blaut, Sullivan & Cromwell LLP
(corporate) income tax (including solidarity surcharge) and, if applicable, church tax will be assessed and levied only at the level of the partners. Trade tax, however, is assessed and levied at the level of the partnership if the shares are attributable to the permanent establishment of a commercial business of the partnership in Germany. Generally, 60% of a capital gain attributable to an individual partner and 5% of a capital gain attributable to a corporate partner are taxable. The trade tax paid by the fund and attributable to the individual’s general profit share is completely or partially credited against the partner’s individual income tax in accordance with this lump-sum method (see above). Foreign Tax Residents Capital gains from disposals by a shareholder not tax resident in Germany are generally only taxable in Germany if the selling shareholder holds the shares through a permanent establish - ment or fixed place of business in Germany or as business assets for which a permanent repre - sentative is appointed in Germany. In this case, the description above for German tax resident shareholders who hold their shares as business assets applies accordingly. Interposition of Funds Typically, investments in growth and start-up companies are made in funds structured as partnerships, which tend to be tax-transparent structures if certain criteria are met. Simply put, merely managing one’s own assets, regardless of size, is not considered a commercial activity. However, details are heavily disputed in prac - tice, and whether or not tax transparency of the fund can be achieved requires a case-by-case analysis. If it is the case, then, due to the tax transparency of the fund, the above considera - tions regarding a direct investment in a portfolio
company apply accordingly – ie, there is no dif - ference as far as an investor is concerned. By contrast, if the fund qualifies as trading ( gewer- blich ), it is subject to trade tax; the trade tax paid by the fund and attributable to the individual’s general profit share is completely or partially credited against the shareholder’s individual income tax in accordance with the lump-sum method (see above). Carried Interest Carried interest received by VC/private equity fund initiators (typically managing LPs) is, in case of a tax-transparent fund, subject to the partial income method – ie, only 60% is subject to tax at the marginal income tax rate of the carried interest participant. Political attempts to abolish this tax advantage for carried interest resulting from tax-transparent funds have been effectively resisted. It should, however, be noted that the tax treatment of the carried interest received by the initiators of a trading ( gewerblich ) fund is heavily disputed. 4.3 Government Endorsement On 15 December 2023, the Future Financing Act came into effect. The objective of this legislative measure was to facilitate access to capital mar - kets and equity financing for start-ups, growth companies and SMEs, in particular. This is to be achieved through, among others, digitisation, deregulation and internationalisation in the areas of capital markets law, corporate law, and tax law. The Future Financing Act (re)-introduces dual- class shares for (later-stage) start-ups in the form of AGs/SEs, which signifies a significant shift driven by international competition within the capital markets. With several European countries now permitting multiple voting shares in public companies, this new legislation seeks
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