Prior to financial year 2023, it was only the German investors in a non-German private equity fund that were legally obliged to file the fund’s German partnership tax return ( called “gesonderte und einheitliche Gewinnfeststellung”; similar to a K-1 in the US) in case of the fund having more than one German investor. Starting from fiscal year 2023, a material change took place: it is no longer the German investors but the funds themselves that are legally obliged to file German partnership tax returns. As a result, basically from FY 2023 onwards, non-filing of the German partnership tax return can result in adverse tax consequences (e.g., late filing penalties etc.) at the level of the fund.

Determination of Whether More than One German Investor Exist Not Trivial Anymore

A legal obligation to file a German partnership tax return for a non-German PE fund only exists in case of more than one German investor. It may be an easy task to determine the direct German investors e.g., in case of German GmbHs as investors with a legal seat in Germany. However, German investors are often not invested directly, rather, the investment is held indirectly via a transparent non-German entity, e.g., a Lux SCS.

As a result, the determination of German investors become tricky in case of a non-German transparent entity, like a Lux SCS being a fund’s direct investor with the Lux SCS itself having direct/indirect German investors. Whilst Lux SCS is considered transparent for German tax purposes, it is required to file a German partnership tax return itself and therefore, needs registration for German tax purposes in case the Lux SCS has more than one German investor. In such a scenario, the Lux SCS itself is considered to be one German investor of the fund, resulting in the legal filing obligation of the fund in case there is another German investor in the fund.

As a side note: Even in case of only one German investor (resulting in no obligation to file a partnership tax return) the German investor needs pro forma tax reporting (and often requests such tax reporting as per side letter agreement with the fund) in order to include the fund income in their (corporate) income tax return.

Recommendation

No urgent need should exist at a fund level in case the funds’ partnership tax returns are already handled by a German tax advisor, since the tax advisor will take care of it as usual. However, private equity funds without having engaged a German tax advisor yet needs to monitor and track the existence of German investors to avoid adverse tax consequences at the fund level.