German Tax Reporting
for Hedge Funds
Frank Schmidt
28th & 29th September 2009
Deutsche Börse AG - Eurex
The German Investment Tax Act (1)
 The German Investment Tax Act (Investmentsteuergesetz; “InvStG”) came
into force on 1 January 2004 (the following is based on the assumption that the
BAFin requirements for a foreign fund are met, i.e. that the InvStG applies)
 Introduction of in principle uniform rules for German and foreign funds (i.e.
also for Hedge Funds)
 Categories of funds from a German tax perspective:
 Transparent funds: Compliance with detailed reporting requirements
 Semi-transparent funds: Compliance with minimum reporting requirements
 Intransparent funds: Non-compliance with minimum reporting requirements
German Tax Reporting for Hedge Funds
28th & 29th September 2009
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The German Investment Tax Act (2)
 Transparent funds
 Principle of transparency: Taxation of German investors holding fund units should
be in principle the same as the taxation of a direct investment in the assets hold
by the fund
 Intransparent funds
 German investors are subject to a punitive lump-sum taxation (at least 6 per cent
of the last redemption price determined in the calendar year is assessed!)
 Therefore: German investors will only invest in Hedge Funds (of funds)
directly if the fund provides for a specific German tax reporting to avoid the
lump-sum taxation!
German Tax Reporting for Hedge Funds
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German Tax Reporting requirements (1)
 Year-end Tax Reporting / Tax Reporting of distributions (if any)
 Reconciliation of the fund’s financials with German tax law, e. g.:
– Analysis of the fund’s trading strategy and assets from a German tax perspective
– Reconciliation of the fund’s profit and loss statement
 Calculation of certain bases of taxation:
– Deemed distribution income (= retained earnings; ausschüttungsgleiche Erträge)
– Distributed income (ausgeschüttete Erträge; if any)
– Further tax data (e. g. creditable withholding tax)
 Deemed distribution income:
– Comprises of in particular: Dividends, interest and other income
– Not comprises of e.g. realized capital gains made from derivative transactions (Termingeschäfte) and
short selling (Leerverkäufe); these gains are only taxable at the level of German investors if distributed
or in the case of the disposal or redemption of fund units!
– In the case of Hedge Fund of Funds: Deemed distribution income of transparent or intransparent
target funds have to be taken into account (and distributed earnings; if any)
German Tax Reporting for Hedge Funds
28th & 29th September 2009
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German Tax Reporting requirements (2)
 Tax certificate, issued by e. g. a tax adviser or a certified auditor, is required by
law confirming that the published tax data are in line with German tax law
 In case of reinvestment funds: Publication of the tax reporting and the tax
certificate within four months following the end of the fund’s financial year on the
website of the Electronic Federal Gazette (in practice: In addition, forwarding it to
WM-Daten)
 Punitive lump-sum taxation also applies in the case of belated publications!
 No publication of e.g. the Hedge Fund’s financials or prospectus is required (in
the case of private placement)
German Tax Reporting for Hedge Funds
28th & 29th September 2009
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German Tax Reporting requirements (3)
 Ongoing tax reporting
 Calculation of the following tax data in principle on each valuation date
 Publication - together with the redemption price - in a German business paper or on the fund’s
website (in the case of private placement) (in practice: In addition, forwarding it to WM-Daten)
Function
Relevance for Hedge Funds (of Funds)
Accumulated Deemed
Distribution Income ("ADDI",
akkumulierte thesaurierte
Erträge)
German custodian banks have to retain withholding tax
upon disposals or redemptions of foreign und units.
Required by law to avoid the lump-sum taxation!
Share Profit (and Real Estate
Profit; Aktien- und
Immobiliengewinn)
Principle of transparency: Part of the gain on the
disposal or redemption of fund units relating to shares
held by the fund is (partially) tax free for German
business investors!
ADDI changes only once a year!
Only of importance for Hedge Funds (of funds)
investing in shares or target funds which publish
share profits (otherwise: share profit amounts to nil).
The option for the calculation of the share profit must
be exercised within two months after having issued
fund units to a German investor for the first time!
Interim Profit
(Zwischengewinn)
Taxation of in particular interest income in the case of
disposals or redemptions of fund units during the fund’s
financial year.
Lump-sum taxation applies in case no interim profit
is published; but: Exemption for foreign Hedge
Funds (of funds) comparable with regard to their
investment policy to German Hedge Funds (of
funds)!
German Tax Reporting for Hedge Funds
28th & 29th September 2009
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Summary
 German tax reporting requirements apply in principle to German and foreign Funds,
i.e. also to Hedge Funds
 German investors are subject to a punitive lump-sum taxation, if the Hedge Fund
does not comply with these tax reporting requirements
 Realized capital gains made from derivative transactions (Termingeschäfte) and short
selling (Leerverkäufe) are only taxable at the level of German investors if distributed
or in the case of the disposal or redemption of fund units!
 No calculation of the share profit is required in the case Hedge Funds (of funds) do
not invest in shares or target funds which do not calculate a share profit
 No calculation of the interim profit is required, if foreign Hedge Funds (of funds) are,
with regard to their investment policy, comparable to German Hedge Funds
German Tax Reporting for Hedge Funds
28th & 29th September 2009
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Frank Schmidt
Tax Advisor and German Public Auditor.
Managing Director of PVW GMBH in Frankfurt.
Frank Schmidt is head of the Clifford Chance / PVW tax reporting team
and specialises in particular in tax matters on behalf of foreign
investment and real estate funds with regard to the compliance with the
reporting requirements of the German Investment Tax Act including
issuance of the required tax certificate.
Frank Schmidt
Mainzer Landstraße 46
60325 Frankfurt am Main
Germany
T +49 69 71 99 2635
F +49 69 71 99 4000
frank.schmidt@pvw.de
German Tax Reporting for Hedge Funds
28th & 29th September 2009
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German Tax Reporting
for Hedge Funds
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