German states move to raise carry tax

Federal subdivisions of Germany plan to scrap Germany’s carried interest tax exemption, in effect increasing its tax rate by 20 percent.

German states have drafted legislation to get rid of Germany’s carried interest tax exemption.

Currently German residents pay a maximum of 28.4 percent maximum on carried interest due to a piece of legislation that was passed in 2004. The legislation exempts 40 percent of any distribution of carried interest to a German resident from tax.

However last year several Federal subdivisions (Länder), including Hessia, Schleswig-Hollstein, Rheinland-Pfalz and Bremen planned on ending this exemption. After failing to make that happen earlier this year, another attempt was made this week when it was revealed the exemption will be discussed in the Federal Chamber (Bundesrat) on 22 November.

The legislation would mean that there will be full carried interest taxation from 2013, which would then be taxable as income with a maximum rate of 47.4 percent. There would also be no grandfathering to protect existing funds and carry from vehicles outside of Germany paid to German tax residents.

According to law firm SJ Berwin the Bundesrat is expected to pass this legislation following which the Federal Parliament (Bundestag) will need to decide on whether to introduce the amendments.

“Without the vote of the Federal Parliament nothing happens. Several statements were made by politicians officially and in public which allow the conclusion that this proposal will not find the majority required.” Christian Schatz, a German-based tax partner at SJ Berwin, told sister publication PE Manager.

This is not the first time politicians in Germany have singled out the private equity industry this year. Germany's interpretation of the Alternative Investment Fund Managers (AIFM) directive was seen as strict by many industry sources who described it as going above and beyond what was necessary for transposition.

And former German finance minister Peer Steinbrück recently proposed splitting the retail and investment arms of banks to stop any credit exchange between the two. This would stop banks from funding private equity or lending to buyouts – akin to the Volcker rule and Vickers' report.