FATCA — Impact of US Tax Regulations on German Private Equity Companies

With the Foreign Account Tax Compliance Act (FATCA), the U.S. Internal Revenue Service (IRS) intervenes directly in all transactions with U.S. sources. Accordingly, it is expected that by mid-2013 all private equity companies that receive proceeds from U.S. sources will also have to enter into an agreement with the IRS and report the U.S. persons involved as well as certain related data or submit a corresponding negative declaration.

If the aforementioned requirements are not met, the respective investor is at risk of significant disadvantages. According to the current status, as of 01.01.2015, a 30% "(penalty) withholding tax" will be withheld on reflows (i.e. not only on income, but now also on sales proceeds in addition to interest and dividends) from the USA. According to current knowledge, this cannot be reimbursed subsequently. In this respect, there would then be a definitive taxation, which would possibly even affect all shareholders of the respective private equity company (PE company), regardless of whether US taxpayers are involved or not.

The aim of FATCA is the complete and seamless recording of U.S. taxpayers with their worldwide, i.e. in particular their foreign income. To this end, all accounts and custody accounts indirectly held by U.S. persons are now to be recorded and reporting of all investments, including the resulting sales proceeds, is to be mandatory, regardless of whether they are managed or held in the U.S. or outside.

The so-called QI (Qualified Intermediary) regime, which has been in place since 2001, has proven to be insufficient in this context. Accordingly, banks were already required to report U.S. income (interest, dividends, but not capital gains) generated by U.S. persons. By contrast, separate reporting of income from non-U.S. sources and assets held only indirectly by U.S. persons through, for example, non-transparent structures was not previously required.

History of origins