Finance & Investment Briefing - The German KG Model docx

TheGermanKGModel

Overview

Inthe1970
’
stheGermanKGmodelwasestablishedtoraiseprivateequity
asaformoffinanceforprojects.Toraisethenecessaryfundsinitiatorsset
up alegalentityandplacedtheequityamongindividualsasprivate
investors.Theinvestorsrealisedtaxbenefitsmainlyfrombooklosses
exceedingtheirinvestmentamountplusanannualdividendpaymentas
returnoninvestment.

Sincethen,theGermanKGmodelhassignificantlyincreasedthevolume
andvalueofitstransactions.In2007 fundraisingintheKGmodelmarket
exceeded€10bnequity.Inthefollowingyears oftheeconomiccrisisthe
fundraisingdroppedtoapprox.€5bnperannum.Lastyeartheamountof
equityfromprivateandinstitutionalinvestors totalledupto€5.85bn.

Furthermore,theassetclassesKGfinancingcoveredexpandedintoseveral
typesofassets:ships,realestate,aviation,privateequity,renewable
energy,naturalresources,infrastructure,containers,lifeinsurance
policies,filmsandothermediarights,etc.

ThemainobjectiveoftheGermanKGmodelis assetfinancingby
individualsparticipatinginsinglepurposecompanieswhichare
organizedinthelegalformofaGermanlimitedpartnership
(i.e.
Kommanditgesellschaft,hereinafterʺKGʺ).Mostsignificantly,the
structurehasnospecialcorporatelegislationattachedtoitonsetup.The
legalentityformoftheKGwasingeneralestablishedatthebeginningof

thelastcenturyandisthemostcommonlegalentityformintheGerman
“Mittelstand
”.
ThegeneralconceptoftheKGisunderstoodandaccepted
byprivateinvestors,financingbanks,businesspartnersandother
stakeholders.

Thelegalenvironmentforsuchfundshaschangeddramatically,especially
withrespecttotheapplicabletaxlawandthefinancialsupervision
of fundsprospectusesfortheequityplacement.
wfw.com

Finance&Investment
Briefing
July2012
Contents

Overview
01
Structure
02
Taxation
02
FinancialSupervisionandFurther
Regulation 
04
Contact
06
02
03

FINANCE&INVESTMENTBRIEFING
FINANCE&INVESTMENTBRIEFING
Structure

TheKGhasonegeneralpartnerandoneorseverallimitedpartners.Inthemajorityof
cases,thegeneralpartnerofaGermanKGisalimitedcompany(i.e.Gesellschaftmit
beschränkterHaftung,hereinafterGmbH).Thelimitedpartnersmaybeparticipatinginthe
KGdirectlyorviaatrustee.OftentheKGhasanadvisoryboardrepresentingthe
investorsʹinterests bymonitoringthemanagementofthegeneralpartner.

Theestablishmentof aGmbHasgeneralpartner limitsthe overallexposureofthe
investmenttotheraisedequityofthelimitedpartnersplustheequityoftheGmbH
(minimumequityamountsto€25,000).Insuchcasesinvestorsparticipateinaso‑called
GmbH&Co.KG.Forprivateinvestors,aslimitedpartnersoftheKG,therisk foreach
investorisgenerallylimitedtotheamountofhissingleinvestment.Eachprivate
investor participatesintheprofitandlossoftheKGinproportiontohisequitystake
comparedwiththetotalequity.

ThepurchaseoftheassetsacquiredbytheKGispartlyfinancedbytheequityprovided
bytheinvestorsandpartlyleveragedbybankloans.TheKGreceivesincomefrom
lendingrealestate,containersorplanes,timecharteringships,makinguseofmediarights
orinsurancepoliciesorreceivingincomefromthesaleofelectricity.TheKGisliquidated
aftertheassetshavebeensold.

DependingontheriskprofiletheKGmayinvestinsingleassetsorgroupsofassetsor
maybeorganisedasfundoffundsinvestinginotherKGs.Theinvestmentofthelimited
partnersisbounduntilliquidation(closed‑endfund).

Taxation



1.Generalissues
WiththeexceptionofVATandGermantradetax,whichisdirectlyimposedon aKGin
caseitcarriesonatradeorbusiness,aKGistaxtransparent.Thus,theindividual
partnersarethetaxableentitiesratherthantheKGitself.

AttheKG level,taxableincomeisuniformlyandseparatelydeterminedbythetax
authorityinwhosedistrictthemanagementoftheKGisdomiciled.Thetradetaxburden
oftheKGdependsonthelocallevyrateofthedistrictinwhichtheKGisdomiciledand
mayvarybetween7%and19%oftheincome.Taxationattheleveloftheinvestoris
appliedattheindividualrateofincometax.SinceJanuary1,2007themaximumrateof
incometaxforGermantaxpayers hasbeen 45%plussolidaritysurchargeof5.5%ofthe
assessedincometaxplus,ifapplicable,churchtax.

Where incomegeneratedbytheassetissubjecttoincometaxationinaforeign
country withwhichGermanyhasconcludedadoubletaxationagreement(e.g.byforeign
realestateorbyaforeignrenewableenergyproject),suchincomeistypicallytaxexempt
inGermany.Thus,theGermaninvestormaybenefitfromlowertaxratesinthecountry
wheretheassetislocated.

2.Taxdeductibilityofpreliminarybusinessexpenses
Accordingtothe5thBuildingOwnerDecree(seedecreeoftheFederalMinistryofFinance
datedOctober20,2003),allpreliminaryexpenses(e.g.equityplacementprovisions,
marketingcosts,advisorsʹcharges)incurredatthelevelofafundarenot immediatelytax
deductible.Instead,theywillbeconsideredasincidentalacquisitioncostsoftheassets
ownedbythefund–ifthefundconstitutesaso‑calledbuyerfundwithoutanyreal
possibility for investorstoexertinfluence,asisgenerallythecase.Depreciationofsuch
expensesisapplicabletotheactualperiodofuse fortheinvestment.

3.Taxrulesregardingtheuseoflosses

Inthepast,taxauthoritiesandlegislatorsrestrictedtheamountoflosscreationfor
investmentschemes suchas theKGmodel.Theinitiatorsofclosed‑endfundsreactedeach
time, changingtheir businessmodelsinorderto generateanattractiveoverallinternal
rateofreturnfortheinvestors.

TheTaxDeferralSchemesAct(
GesetzzurBeschraenkungderVerlustverrechnungim
ZusammenhangmitSteuerstundungsmodellen
)adoptednewrulesdesignedtolimitthe usageof
lossesgeneratedbycertaintaxdeferralschemes(seeSection15boftheGermanIncome
TaxAct(
Einkommensteuergesetz
,hereinafter“EStG
”
)).
Accordingtothislegislation,a“tax
deferralscheme
”
isastandardisedtaxstructuredesignedtogeneratetaxbenefitsfor
taxpayersintheformoflosses.Theruleonlyallowssuchlossestobeoffsetagainst
incomegeneratedinlatertaxyearsfromthesamesource.ThelawappliestoallGerman
KGmodels,especiallymediafunds,shippingfunds,andmoviefunds.Thisregulation
appliestoany“TaxDeferralModels
”
inwhichthetaxpayerenroledafterNovember10,
2005.

Sincethen,theinitiatorshavedevelopedhighyieldfunds(“
Renditefonds
”

)
whichusethe
lossesfortaxfreedistributionstotheinvestorsinthefirstyearsoftheirinvestment.
Otherprojectsarestructuredonapureprofitbase,i.e.withoutanycalculatedlosses.

4. Shippingfunds‑Germantonnagetaxsystem
ThemainattractionoftheGermanKGmodel forshippingfunds lies with thebenefits
availableundertheGermantonnagetaxregime.Here,enterprisesandindividualswith
seagoingvesselshavetheopportunitytobetaxedonthebasisofadeemedprofitrelated
totheshipʹstonnageinsteadoftheactualoperatingresults.Thebasisforthecalculation
ofthedeemedprofitisanamountpernettonoftheshipsinoperation.Accordingtothe
Germantonnagetaxsystemtheprofitearnedisfixedatacertainamountandismuch
lowerthantheaverageprofitcalculatedonthebasisoftheregularrulesofdetermination
ofthetaxableprofit.Allprofitsincludingcapitalgainsaswellaslossesfromtheshipping
businessarecoveredbythislump‑sumprofit.Thelump‑sumprofitisthetaxbasisfor
tradetaxandincometaxofallinvestors.Effectivelythelump‑sumallowsanearlytaxfree
incomefromshippingbusinessfor investors.

InordertoqualifyfortheapplicationoftheGermantonnagetaxsystemthefollowing
requirementsmustbefulfilled:

operationofmerchantshipsininternationaltraffic(see(a));

qualifyingpresenceinGermany(see(b));

irrevocableapplication(see(c)).

a. Operationofmerchantshipsininternationaltraffic
Merchantshipsareoperatedininternationaltraffic,ifownedorchartered(self
equipped)seagoingvesselsarepredominantlyregisteredduringthebusinessyearin

aGermanshipregister(itisnotnecessarytoflytheGermanflag)andvesselsare
mainlyusedfortransportationofgoodsorpassengerswithorbetweenforeign
ports,withinforeignportsorbetweenaforeignportandtheHighSeasduringmore
Watson,Farley&Williams
July2012
>
>
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02
03
FINANCE&INVESTMENTBRIEFING
FINANCE&INVESTMENTBRIEFING
Structure

The KGhasonegeneralpartnerandoneorseveral limitedpartners.Inthemajorityof
cases, thegeneralpartner ofaGermanKG isalimitedcompany (i.e.Gesellschaft mit
beschränkterHaftung,hereinafterGmbH).The limitedpartnersmaybeparticipatinginthe
KG directlyorviaatrustee.OftentheKGhasanadvisoryboardrepresentingthe
investorsʹ interests bymonitoringthemanagementofthegeneralpartner.

The establishmentof aGmbHasgeneralpartner limits the overallexposureofthe
investment totheraisedequityofthelimited partnersplustheequityoftheGmbH
(minimum equityamountsto€25,000).Insuchcasesinvestorsparticipateinaso‑called
GmbH&Co.KG.Forprivateinvestors,aslimitedpartnersof theKG,therisk foreach
investor isgenerallylimitedtotheamountofhis singleinvestment.Eachprivate
investor participates intheprofitandlossoftheKGin proportiontohisequitystake
compared withthetotalequity.

The purchaseoftheassetsacquiredbythe KGispartlyfinancedbytheequityprovided
by theinvestorsandpartlyleveragedbybankloans.TheKG receivesincomefrom

lending realestate,containersorplanes, timecharteringships,makinguseof mediarights
or insurancepoliciesor receivingincomefrom thesaleof electricity.TheKG isliquidated
after theassetshavebeensold.

Depending ontherisk profiletheKGmay investinsingle assetsorgroupsof assetsor
may beorganisedas fundoffundsinvesting inotherKGs. Theinvestmentofthe limited
partners isbounduntilliquidation(closed‑endfund).

Taxation


1. Generalissues
With theexceptionofVATandGermantradetax,which isdirectlyimposedon aKGin
case itcarriesonatradeorbusiness,aKGistaxtransparent.Thus,theindividual
partnersarethetaxableentitiesratherthantheKGitself.

At theKG level,taxableincomeisuniformlyandseparatelydetermined bythetax
authority inwhosedistrictthemanagementoftheKGisdomiciled.Thetrade taxburden
of theKGdepends onthelocallevyrate ofthedistrictin whichtheKGis domiciledand
may varybetween7%and19%oftheincome.Taxationattheleveloftheinvestoris
applied attheindividualrateofincometax.SinceJanuary 1,2007themaximumrateof
income taxforGermantaxpayers hasbeen 45%plussolidaritysurchargeof5.5%ofthe
assessed incometaxplus,if applicable,churchtax.

Where income generatedbytheassetissubjecttoincometaxationinaforeign
country with whichGermanyhasconcludedadoubletaxationagreement (e.g.byforeign
real estateorbyaforeignrenewableenergyproject),suchincomeistypicallytaxexempt
inGermany.Thus,theGermaninvestormaybenefitfromlowertaxratesinthecountry
where theassetislocated.


2. Taxdeductibilityofpreliminarybusinessexpenses
According tothe 5thBuilding OwnerDecree (seedecree oftheFederal Ministryof Finance
dated October20,2003), allpreliminaryexpenses(e.g. equityplacementprovisions,
marketing costs,advisorsʹcharges)incurredatthelevelofa fundarenot immediatelytax
deductible. Instead,theywillbeconsidered asincidentalacquisitioncostsof theassets
owned bythefund–if thefundconstitutes aso‑calledbuyerfundwithoutanyreal 
possibility for investors toexertinfluence, asisgenerallythe case.Depreciationofsuch
expenses isapplicabletothe actualperiodofuse for theinvestment.

3. Taxrules regardingtheuse oflosses
In thepast,taxauthoritiesandlegislatorsrestrictedtheamountoflosscreationfor
investment schemes suchas theKG model.Theinitiatorsof closed‑endfundsreacted each
time, changing their businessmodelsinorderto generateanattractiveoverallinternal
rate ofreturnfortheinvestors.

The Tax DeferralSchemes Act(
GesetzzurBeschraenkung der Verlustverrechnung im
ZusammenhangmitSteuerstundungsmodellen
) adoptednew rulesdesignedto limitthe usage of
losses generatedbycertaintax deferralschemes(seeSection15b oftheGermanIncome
Tax Act(
Einkommensteuergesetz
, hereinafter“EStG
”
)).
According tothislegislation,a “tax
deferral scheme
”
is astandardisedtaxstructuredesignedtogeneratetaxbenefitsfor
taxpayers intheformoflosses. Theruleonlyallowssuchlossesto beoffsetagainst

income generatedinlatertaxyearsfromthesamesource.The lawappliestoallGerman
KG models,especially mediafunds, shippingfunds, andmoviefunds. Thisregulation
applies toany“TaxDeferral Models
”
in whichthetaxpayerenroledafterNovember10,
2005.

Since then,theinitiators havedevelopedhigh yieldfunds(“
Renditefonds
”
)
whichusethe
losses fortaxfreedistributionstotheinvestorsinthefirstyearsoftheirinvestment.
Other projectsarestructuredonapureprofitbase,i.e.withoutanycalculatedlosses.

4. Shipping funds ‑Germantonnagetaxsystem 
The mainattractionoftheGerman KGmodel forshippingfunds lies with the benefits
available undertheGermantonnagetaxregime.Here,enterprises andindividualswith
seagoing vesselshavetheopportunity tobetaxedonthe basisofadeemedprofit related
to theshipʹstonnageinsteadoftheactualoperatingresults. Thebasisforthecalculation
of thedeemedprofit isanamountper nettonofthe shipsinoperation.According tothe
German tonnagetaxsystemtheprofitearnedisfixedatacertainamountandismuch
lower thantheaverageprofitcalculatedonthebasisofthe regularrulesofdetermination
of thetaxableprofit.Allprofits includingcapitalgainsaswellas lossesfromtheshipping
businessarecoveredbythislump‑sumprofit. Thelump‑sumprofitisthetaxbasisfor
trade taxandincometax ofallinvestors.Effectivelythe lump‑sumallowsanearlytaxfree
income fromshippingbusinessfor investors.

In ordertoqualifyforthe applicationoftheGermantonnagetax systemthefollowing
requirements mustbe fulfilled:


operation ofmerchantshipsin internationaltraffic(see(a));

qualifying presencein Germany(see (b));

irrevocable application(see (c)).

a. Operation of merchant shipsin international traffic
Merchant shipsareoperatedininternationaltraffic,if ownedorchartered(self
equipped) seagoingvesselsarepredominantly registeredduringthebusiness yearin
a Germanshipregister(itisnotnecessarytoflytheGermanflag)and vesselsare
mainly usedfortransportationofgoodsorpassengerswithorbetweenforeign
ports, withinforeignportsorbetweena foreignportandtheHighSeasduring more
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July2012
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
b. QualifyingpresenceinGermany
Therequirementfor aqualifyingpresenceinGermany isthatthemanagementofthe
businessestablishment mustbelocatedinGermanyandthattheshipping
company undertakesalmostallof itsstrategicandcommercialshipmanagement
servicesfromGermany.

c. Irrevocableapplication

TheswitchtotheGermantonnagetaxsystemisoptional(theapplicationis
irrevocable).Theapplicationhastobefiledinthebusinessyearduringwhichthe
shipisbuiltorbought(commission)witheffectfromthebeginningoftherespective
businessyear.Lossescanneitherbebalancednorsetoff.Otherwise,companiescan
onlyopttenyearslater.Theelectionisbindingforaperiodoftenyears.

Thelawexplicitlyexpandsthetonnagetaxregimetorimechartervesselsincasethe
abovementionedrequirementsaremetandtheshipmanagementisperformedbythe
charteroperatorinGermany.Anexistingfleetofvesselsunderthetonnagetaxregimecan
beexpandedbyvesselscharteredinfromanothershipowner.Incasethechartered
vesselsarenotregisteredinGermany,acertain ratioof foreignregisteredvessels
to Germanregisteredvesselsmustnotbeexceeded.Howeverincomefrombare‑boat
charterdoesnotqualifyforthetonnagetaxregime.

TheGermantonnagetaxregimeisbasedontheEuropeanguidelinesforstateaidto
maritimetransportwhicharecurrentlyunderreviewbytheEuropeanCommission.

FinancialSupervisionandFurtherregulation

Inthepast,nofinancialsupervisoryregulationwasapplicabletoofferingorbrokeringKG
investments,becauseclosed‑endfundsarestructuredascompanyparticipations.The
obligationtoobtainapprovalforinvestmentmodelsfromtheFederalFinancial
SupervisoryAuthority(
BundesanstaltfürFinanzdienstleistungsaufsicht
‑knownas“BaFin“
)
radicallychangedthepreconditionsfortheplacementofclosed‑endfundsin2005.Since
July1,2005,BaFinexaminestheprospectusesissuedforinvestmentsinGermanclosed‑
endfundKGs.Thefinancialsupervisionhasrecentlybeenstrengthenedfurther:Since
June1,2012,closed‑endfundparticipationsarenowtreatedlikeotherfinancial

instruments.

Offerorsofparticipationsinclosed‑endfundsmust,asamatterofprinciple,publisha
salesprospectus.Exemptionsexistforcertaintypesofclosed‑endfundssuchasclubfunds
(notmorethan20investors)orhighinvestmentfunds(minimuminvestmentof€200,000
perinvestor).ApprovalbyBaFinisrequiredforpublicationoftheprospectuswhich,in
turn,isaconditionforsellingtheinvestments.TheBaFininvestigationperiodis20
businessdays.BaFinwillgrantitsapprovaliftheprospectuscontainsalldetailsrequired
undertheInvestmentAct(Vermögensanlagegesetz)andifitiscomprehensibleand
consistent.Theprospectusmayhavetobeupdatedduringthepublicofferingperiod.The
prospectusisthekeybasisforliabilityifitisnotcorrectorifitdoesnotcontainall
materialinformationwhichisneededforaninformedinvestmentdecision.

Inadditiontotheprospectus,offerorsmustpublishaninvestmentinformation
sheet (Vermögensanlagen
‑
Informationsblatt
)containing keyinformationontheinvestment
thanhalfoftheirtotaloperatingtime.Otherqualifyingshiptypesarevesselsused
fortowage,salvageorexploration.Forcruiseshipsanindividualtaxrulingis
necessary.
x 
Watson,Farley&Williams
July2012
05
FINANCE&INVESTMENTBRIEFING
onamaximumofthreepages.Liketheprospectus,theinvestmentinformationsheetmay
havetobeupdatedduringthepublicofferingperiod.Theinformationsheetcanalsobea
basisforliabilityifitiswrongormisleadingornotinlinewiththeprospectus.


Salesandbrokerageofclosed‑endfundparticipationsbybanksandcertainothertypesof
brokersissubjecttothegeneralregulationsandobligationsoftheSecuritiesTradingAct
(
Wertpapierhandelsgesetz
).Brokerswhoseactivitiesarelimitedtoadvisingonandbrokering
investmentproductsotherthansecuritiesareexemptfromtheSecuritiesTradingAct.
However,forthese“freebrokers
”,
comparableregulationsshallcomeintoforceasof
January1,2013. 

Undercertaincircumstancesandforcertaininvestmentsadditionallicenseswillbe
requiredundertheGermanBankingAct(Kreditwesengesetz),inadditiontoBaFin
’
sapproval
oftheprospectus.Inparticularthismayapply iftherelevantclosed‑endfundinvestment
involvessecurities.

Furtherregulationforclosed‑endfundsisplannedtobe announced in2013,whentheEU
DirectiveonAlternativeInvestmentFundManagers(
AIFM
) isset tobeimplemented.
Currently,theEUCommissionisstillworkingondetailsof regulationregardingthe
requiredimplementationmeasures,withtheassistanceoftheEuropeanSecuritiesand
MarketsAuthority(ESMA).TheAIFMDirectiveandtheimplementationlegislationshall
beapplicabletothemanagersofclosed‑endfunds.


PleasebeawarethatthisbriefingisdesignedonlytosummarisekeyinformationrelatingtotheGerman
KGmodel.Itshouldnotberelieduponwithouttakingfurtheradvice.Ifyouhaveanyquestionsabout

issuesraisedinthisbriefing,oranyotherfinanceandinvestmentlawmatter,pleasegetintouchwith
yourregularcontactatWatson,Farley&Williams.
GerritBartsch
Partner
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
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
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
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

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Fax:+4989237086222
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
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
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

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