Tax evader thanks to private equity investment? Notification requirements for foreign shareholdings

Not least since the appearance of various CD-ROMs with the data of German citizens and their account connections and movements abroad, the timely and accurate taxation of foreign engagements has again gained in importance.Worldwide, the exchange of information in tax matters - especially with the so-called tax havens - has been advanced. In Germany, the tax authorities are now increasingly reviewing the foreign relations of German residents in this context.

German tax law is sometimes very complicated and confusing. Due to a legal regulation that is often not known and/or observed, investors in private equity companies may be at risk of becoming tax evaders. This shows once again that the special features of private equity as an investment form were not sufficiently thought through when a tax law was enacted.

Since 2002, there has been a notification requirement for foreign shareholdings. This can usually be fulfilled without major effort in the case of a direct investment. However, it poses major problems for investors in private equity investments, as these are likely to be unable, in purely practical terms, to notify the tax authorities of a foreign acquisition of an investment within the legally prescribed period due to their often multi-layered domestic and foreign investment structures.

As tax advisors to many private equity structures, we would like to explain below the legal requirements as well as the current problems and developments in practice.

Facts subject to notification

For participations of natural persons and companies subject to tax in Germany in foreign partnerships or corporations, the tax authorities have provided for a reporting obligation of the participant to the tax authorities in certain cases, which is set forth in Sec. 138 (1). 2 AO (German Fiscal Code) is regulated. These include