Germany is frequently used by advisers and managers for the formation of venture capital, private equity and similar closed-end alternative investment funds (AIFs), as well as for retail funds whenever the manager of the respective investment fund is located in Germany – ie, Germany is generally not used as a domicile for structuring alternative investment funds or retail funds by non-German advisers or managers. Typically, German private equity or venture capital funds are structured as limited partnerships that are transparent for German tax purposes.

German resident institutional investors and German family offices are frequent targets of fundraising activities for venture capital, private equity and similar alternative investment funds located in Germany or various other jurisdictions around the world.

The investment-type restrictions for regulated general special funds translate only into assets that can be valued at fair value and risk diversification. In practice, regulated special funds are often set up under a specific fund category (eg, special funds with fixed investment guidelines). Accordingly, for these funds, investment-type restrictions apply based on the chosen fund category and individualised investment guidelines (eg, real estate focus or debt fund).

Borrowing restrictions depend on the chosen fund category. For instance, special funds with fixed investment guidelines allow short-term borrowing of up to 30% of their net asset value and, for real estate, up to 60% of the real estate value. For German debt funds, the borrowing restrictions introduced by AIFMD II apply for AIFs of fully licensed managers, but existing requirements for registered managers are expected to be lifted in early 2026.

If the fund manager is fully licensed, they must appoint a depositary or special private equity custodian for each of the funds (as required by the AIFMD).

The valuation and pricing of the fund’s assets must be in line with the AIFMD requirements – ie, fair value.

The operational requirements of a fully licensed manager are in line with the AIFMD. In addition, fund managers must adhere to rules that apply to all market participants, such as the EU-based rules on insider dealing and market abuse, transparency, money laundering and short selling. Special internal rules apply to the manager (“manager-internal rules”) regarding debt funds.

Sub-threshold managers are only subject to a light-touch regulatory regime. Accordingly, no operational requirements apply, in principle, from a regulatory perspective (except with regards to debt funds).

Accessibility to Borrowing for Funds

Funds that are eligible for non-trading treatment from a tax perspective (see also 2.6 Tax Regime) are generally neither permitted to raise debt at fund level nor to provide guarantees or other forms of collateral for the indebtedness of portfolio companies. As an exception, tax authorities have accepted that funds can enter into a capital call facility subject to certain restrictions, and the number of funds making use of this concession has increased, as has the number of financial institutions offering capital call facilities to German funds. Leverage is not permitted for tax reasons and is restricted for regulatory reasons.

Restrictions on Borrowings

The criteria for non-trading treatment from a tax perspective do not allow borrowings at fund level. As an exception, short-term borrowings to bridge capital calls are accepted by tax authorities. While “short-term” has not been defined, borrowings cannot remain outstanding for more than 270 calendar days. Fund managers need to first issue the capital call and can thereafter draw down the amount under the capital call facility. The amount so borrowed is then repaid out of the capital contributions. In addition, borrowing restrictions introduced by AIFMD II will apply for AIFs of fully licensed managers.

Lenders Taking Security

Under German law, the investors’ commitment to the capital of a fund is not an asset that can be pledged in favour of the capital call facility provider. As a consequence, capital call facility agreements entered into by German funds typically provide that payments of capital contributions shall be made to a bank account maintained with the facility provider that is pledged in its favour. In addition, the facility provider reserves the right to claim payment of capital contributions directly from investors when due, and to enforce the fund’s rights under the fund 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 investors 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 investors 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.

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:
1. 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
2. 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 investments of at least three years; and
• no involvement in the operating management of portfolio companies whereby representation on the supervisory or advisory board of portfolio companies in a non-executive, monitoring capacity is permitted.

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 administrative 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 obligation 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 Germany. 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 partnership 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 accordance with their personal tax status. In case of a trading fund partnership the income of non-resident 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% (including solidarity surcharge) at source. Generally, the withholding agent (German portfolio companies or a German issuer of a profit-linked debt instrument) 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 refunded upon tax assessment.

Carried-interest participants

The German fiscal authorities characterise carried-interest payments as a compensation for professional services, and carried-interest payments are not taxed in accordance with the rules applicable to the source from which such payments are derived. Carried-interest payments by private equity funds and venture capital funds that are eligible for non-trading treatment are eligible for a partial tax exemption of 40%, and the remaining 60% is subject to tax at the marginal income tax rate of the carried-interest participant.

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 participant. According to a decision rendered by the German federal tax court in December 2018, carried-interest payments by funds that are treated 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 as to whether or not 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 specific 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 an expense at partnership level (which might be non-deductible in certain scenarios) but as (disproportional) allocation of income which reduces the income of the investors. Despite the decision of the German federal tax court, there is still no consistent application of the principles laid down in this decision.

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.

Domestic funds eligible for non-trading treatment

Partnership-type funds are treated as transparent for German tax purposes. Therefore, taxable income allocated to the investors is subject to tax at its level and in accordance with its tax status, regardless of whether or not the fund made distributions.

Germany will decrease the corporate income tax rate which is currently 15% plus solidarity surcharge of 5.5% thereon (resulting in a cumulative rate of approximately 15.8%) by 1 percentage point per year commencing in 2028 to a rate of 10% (plus solidarity surcharge thereon resulting in a cumulative rate of 10.6%) by 2032.

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 German portfolio companies and payments on certain 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

Funds 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, similar to the taxation of income from non-trading funds. However, corporate investors of a domestic trading fund partnership benefit from a trade tax deduction as the fund partnership pays trade tax itself. This does not apply to life and healthcare insurance companies which have other mechanisms to avoid a double trade tax burden.

Non-resident corporate investors

Generally, non-resident corporate investors of a domestic trading fund partnership are subject to the same tax consequences as resident corporate investors and they must file a German tax return. In particular, German withholding tax can be credited against the German tax liability of a non-resident investor and an exceeding amount (if any) will be refunded upon tax assessment.

Non-German funds

Regardless of the qualification of their investment activities, non-German funds are typically deemed to be trading from a German tax perspective due to their legal structure.

Resident corporate investors

The allocable share of a non-German (deemed) trading fund’s taxable profits is subject to German tax. 95% of equity capital gains is exempt from corporate income tax and 100% is exempt from trade tax. These exemptions do not apply to life and healthcare insurance companies. The full amount of interest and dividends is subject to corporate income tax, but trade tax is levied only on interest and on dividends where the fund holds less than 10% of the company paying the dividend. Due to changes in the applicable legislation and some court decisions, the better view should be that there should not be any German trade tax at all in case an investor holds less than 10% in a non-German (deemed) trading fund.

Non-resident corporate investors

The deemed trading status of non-German funds does not affect their taxation in Germany. Their allocable share of German equity capital gains is exempt from German tax. However, they may be required to file a German tax return where they have held 1% or more of the share capital of the German company, the shares of which were sold or disposed of (determined on a look-through basis) during the last five years prior to such sale or disposition. They are only subject to tax in Germany in respect of items of income derived from German sources that are subject to German withholding tax at a rate of approximately 26.4% – ie, German dividends and payments on certain profit-linked debt instruments by German issuers. Tax treaty-protected investors may apply to the German federal tax office for a refund under an applicable tax treaty.

Corporate-Type Funds

The taxation of corporate-type funds (including funds of a contractual type such as the German Sondervermögen and non-German fund vehicles that resemble a German Sondervermögen, including trusts) and their investors is governed by the German Investment Tax Act.

Fund level

A corporate-type fund is a taxpayer in and of itself. Regardless of whether its place of business management is located in or outside Germany, only certain items of German-source income are subject to tax at the level of the fund.

• German-source dividends.
• Income derived from German real estate (not dealt with herein).
• Trading income attributable to a German permanent establishment, but excluding capital gains realised upon the sale of shares of companies. However, if such shares form part of a trade or business and are attributable to a German permanent establishment, the full amount of capital gains from the sale of such shares by a corporate-type fund and any other trading income attributable to such German permanent establishment is subject to German tax at the level of such corporate-type fund.

Investor level

Non-resident corporate investors

Distributions by corporate-type German or non-German funds to non-resident investors are not subject to (withholding) tax in Germany.

Resident corporate investors

Resident investors are subject to German tax on the following three items of income derived from a corporate-type fund:

• all distributions;
• a lump-sum advance amount that represents a minimum yield and is only subject to tax if the corporate-type fund does not make distributions equal to, or exceeding, the lump-sum advance amount; and
• capital gains realised upon the sale of shares of the corporate-type fund either in a secondary transaction with a third party or in connection with a redemption of shares or a share buy-back by the corporate-type fund.

These three items of income subject to tax at the level of resident investors are eligible for a partial tax exemption in order to mitigate double taxation at fund and investor level if the corporate-type fund qualifies as a so-called equity fund or mixed fund. An equity fund is a corporate-type fund whose binding investment guidelines provide that more than 50% of the total net assets is directly invested throughout the entire fiscal year in equity instruments issued by companies being subject to minimum taxation requirements. For a mixed fund, the relevant threshold for direct equity investments is at least 25%.

For equity funds, the partial tax exemptions for taxable resident corporate investors (other than life or healthcare insurance companies) amount to 80% for corporate income tax purposes and 40% for trade tax purposes. In respect of mixed funds, the partial tax exemptions amount to half of the exemptions applicable to equity funds.

Germany’s Tax Treaty Network and Its Impact on the Funds Industry

Germany’s tax treaty network is extensive and covers, among others, all member states of the EU and the OECD. German tax treaties generally follow the OECD Model Convention. German corporate-type funds should be eligible for protection by German tax treaties regardless of the fact that their tax bases only include certain items of German-source income. Because distributions by German corporate-type funds to non-resident investors are not taxable in Germany under German domestic tax law, non-resident investors need not rely on treaty benefits in this regard.

Funds organised as partnerships are transparent for income tax purposes. German investors benefit from Germany’s tax treaty network because the geographic focus of funds typically relates to tax treaty countries. Funds investing in Germany benefit from Germany’s tax treaty network because their fundraising very often relates to investors resident in tax treaty countries. However, virtually none of the German tax treaties provide any benefits for non-resident investors in case of income from trade or business that is attributable to a German permanent establishment. In case of trading treatment of a fund partnership from a German perspective this may give rise to mismatches in case the tax authorities of the country of residence of a non-resident investor take a contrary view.

FATCA and CRS Regimes in Germany

Germany has entered into a Model-1 intergovernmental agreement (IGA) with the USA and has incorporated the reporting and disclosure requirements under the Foreign Account Tax Compliance Act (FATCA) as modified by the IGA into German domestic law. Accordingly, German fund managers have to file information under FATCA with the German federal tax office, which exchanges such information with the US Internal Revenue Service (IRS). As a consequence, German fund managers do not have a direct obligation towards the IRS regarding FATCA reporting and disclosure.

Germany has also incorporated the Common Reporting Standard (CRS) into domestic law. As a result, German fund managers have an obligation under German domestic law to file information under the CRS with the German federal tax office, which exchanges this information with the competent tax authorities of the participating countries of the CRS.

DAC 6

The tax treatment and tax structure of partnership-type funds is typically not subject to filing requirements under DAC 6 (EU Council Directive 2011/16 in relation to cross-border tax arrangements). In particular, the trading or non-trading status of a partnership-type fund should not give rise to filing obligations under DAC 6. Moreover, the German tax authorities have provided guidance that the PPM or a similar document that outlines the risks and benefits of an investment does not constitute standardised documentation within the meaning of Hallmark A 3 of Part II of Annex IV to DAC 6.

The Anti-Tax Avoidance Directive (ATAD)

As Germany, like most other countries, treats partnerships as being tax-transparent, an investment in a partnership-type fund should not give rise to hybrid mismatches. However, if an investor is residing in a country that treats partnerships as opaque, any income of a German partnership-type fund attributable to such investor is subject to German tax to the same extent as if such investor were resident in Germany.

Investments in funds of a contractual type, such as the German Sondervermögen or non-German fund vehicles that resemble a German Sondervermögen, may give rise to hybrid mismatches, particularly in situations where the home jurisdiction of a non-German fund of a contractual type treats this fund as tax-transparent while Germany treats such funds as opaque under the German Investment Tax Act.

Minimum Taxation

As an EU member state, Germany implemented Counsel Directive (EU) 2022/2523 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union including a qualified domestic top-up tax. However, this should not have an impact on funds themselves as they are exempted from the scope of minimum taxation as ultimate parent entities. However, special rules may apply if a fund becomes part of an MNE (multinational enterprise) group subject to minimum taxation.

Germany offers different types of retail funds – eg, UCITS, real estate funds, funds of hedge funds, closed-end funds and infrastructure funds. The fund types are based on the UCITS investment and borrowing restrictions as the default rules. The investment and borrowing restrictions are then modified to fit each fund type.

The KAGB contains a catalogue of assets in which a closed-end Public AIF may invest. The investment in other funds by a closed-end Public AIF is restricted (ie, the structuring of a fund of funds or feeder fund as a retail fund).

For a further overview, see 2.4 Operational Requirements.

The explanations given in 2.5 Fund Finance (regarding alternative investment funds) also apply to fund finance for retail funds.

German tax law does not provide for a specific tax regime applying to funds targeting retail investors. However, for taxation at investor level, different tax rules apply to institutional corporate investors and retail individual investors. The rules for retail individual investors are as follows.

Funds Organised as Partnerships

Domestic funds eligible for non-trading treatment

Resident retail individual investors

A resident retail individual investor’s allocable share of interest, dividends, capital gains relating to debt instruments and equity capital gains of shareholdings representing an indirect interest of less than 1% are subject to German income tax at a flat rate of approximately 26.4% (including solidarity surcharge) plus church tax, if applicable. Equity capital gains of shareholdings representing an indirect interest of 1% or more are subject to German income tax levied at the marginal tax rate, but 40% of such capital gains are exempt from income tax.

Non-resident retail individual investors

A non-resident retail individual investor’s allocable share of interest (other than profit-linked), dividends from non-German portfolio companies, capital gains relating to debt instruments and equity capital gains aside from shareholdings in German portfolio companies representing an indirect interest of less than 1% are not subject to German income tax.

Equity capital gains of shareholdings in German portfolio companies representing an indirect interest of 1% or more are subject to German income tax at the marginal tax rate, but 40% is exempt from income tax. Tax will be levied by way of assessment, based upon a German tax return to be filed by the non-resident retail individual investor. Such German tax-paying obligation does not apply to non-resident retail individual investors who are entitled to tax treaty benefits.

A non-resident retail individual investor’s allocable share of dividends from German portfolio companies is subject to German withholding tax at the rate of approximately 26.4%, and investors who are entitled to tax treaty benefits can file an application with the German federal tax office for a refund of the excess of the German withholding tax over the amount permitted under the applicable tax treaty.

Domestic funds eligible for trading treatment

Resident retail individual investors

Generally, a resident retail individual investor’s allocable share of income from a domestic trading fund partnership is subject to its personal income tax rate plus solidarity surcharge thereon. However, 40% of dividends and capital gains of shareholdings are exempt from tax (so-called partial income taxation). While a trading fund partnership is subject to trade tax at its own level (see 2.6 Tax Regime) there is no additional trade tax at the level of resident retail individual investors. Rather, resident retail individual investors are entitled to a tax credit of their allocable share of the trade tax paid by the partnership. However, this mitigates but does not eliminate the trade tax burden.

Non-resident retail individual investors

In case of a domestic trading fund partnership, the taxation of a non-resident retail individual investor is identical to the taxation of a resident retail investor. Non-resident retail individual investors must file a German tax return. Treaty benefits are not available to non-resident individual investors of a domestic trading fund partnership.

Non-German funds

Resident retail individual investors

As set forth in 2.6 Tax Regime, non-German funds are typically trading from a German tax perspective. Accordingly, a resident retail individual investor’s allocable share of a non-German fund’s taxable profits is subject to German income tax as follows: 60% of equity capital gains and dividends, and the full amount of interest is subject to German income tax at the marginal tax rate.

Non-resident retail individual investors

While non-German funds are typically trading from a German tax perspective, they typically do not operate a German permanent establishment to which their income would be attributable. Accordingly, a non-resident retail individual investor’s allocable share of the taxable profits of a non-German fund is subject to German tax only on German-source items of income, in accordance with the rules explained above for German funds that are eligible for non-trading treatment.

Corporate-Type Funds

Non-resident retail individual investors

Income derived from German or non-German corporate-type funds (including funds of a contractual type such as the German Sondervermögen and non-German fund vehicles that resemble a German Sondervermögen) is not subject to tax in Germany.

Resident retail individual investors

The three items of income described in 2.6 Tax Regime and derived by them from a German or non-German corporate-type fund are subject to German income tax at a flat rate of approximately 26.4% (including solidarity surcharge) plus church tax, if applicable. The partial tax exemptions for which they may be eligible amount to 30% in respect of equity funds and 15% in respect of mixed funds. Resident retail individual investors are not subject to trade tax.

Germany is constantly implementing any EU directives and modernising its rules, by a number of amendments to the KAGB. Recent changes have already been discussed throughout this chapter, where relevant. Following AIFMD II, the required changes to the KAGB are already in the legislative process and are expected to just mirror the revised AIFMD. In addition, BaFin reviews and updates its administrative pronouncements and FAQs on a regular basis. The German government has launched legislative initiatives intending to, inter alia, improve the tax treatment of investments by certain investment funds in Germany, and provide relief from German taxation of shareholders of passive foreign investment companies below certain thresholds. Moreover, domestic pension fund regulation was amended to expand options to invest in infrastructure and certain assets with a higher risk profile. The measures are in line with the German government’s intention to channel private capital into investments in infrastructure, renewable energies, and innovation. This also includes efforts to attract private funds under the roof of a “Germany Fund”. It remains to be seen whether and to what extent this will also affect German investment funds and investor regulation as well as fund taxation.