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Report: Germany considering domestic PE tax

A German business daily has reported that the country’s finance ministry is considering a potentially damaging tax on earnings generated by local venture capital and private equity firms.

German business daily Handelsblatt has reported that the German finance ministry is considering taxing the earnings of local private equity firms.

The move is part of a planned corporate tax reform said the report, citing unnamed sources, and would involve taxing domestic private equity funds and funds of funds.

A spokesperson for the German finance ministry told Handelsblatt that there are no “concrete plans that go in this direction”.

Thomas Pütter, chief executive of Allianz Capital Partners and chairman of the board of the German Venture Capital Association (BVK) said that no official declaration has been made regarding taxation of the domestic private equity industry. To date, official discussion has focused on the introduction of real estate investment trusts (REITs) and their possible taxation.

Pütter said that any taxation of the German private equity industry would go against the mandate set out by the German government at the beginning of this year to help foster and improve the domestic market.

“Any such decision would see the demise of the German VC market and private equity industry just at the time when work is being done to mobilise the industry and the economy,” Pütter told PEO. “The government needs to raise funds through taxation but if they were to make this decision, it would scare off any foreign investors such as pension funds that would consider investing in German venture capital funds. The government wouldn’t get any monies as there would be no firms to tax.”

A move by the German government to tax local private equity firms could have a devastating effect on the country’s venture capital industry, which is currently seeing moderate growth after being hit heavily by the dotcom crash at the beginning of the decade and charges of being “locusts” by SPD party chairman Franz Muntefering in mid-2005.

According to a study by Ernst & Young last December, the level of investment by private equity firms in Germany saw an improvement in 2005, with approximately €30 billion ($38 billion) invested, an increase of €6 billion over the previous year.

A more recent survey by KPMG revealed strong confidence in the German private equity market, with 56 percent of those surveyed at a German private equity conference expecting an increase in the country’s Mittelstand sector.

The BVK recently reported on activity in the first quarter of 2006, showing that member firms raised new funds totalling €553.1m, including six funds totalling €311.1m from external investors. Investments in the first quarter totalled €510.8 million.