The German Ministry of Finance issued on 15 April 2010 a Tax Circular ("Tax Circular") clarifying the tax reporting obligations of German investors holding shares or similar interests in non-German partnerships and in other (corporate) entities.

Under German law, a German tax resident acquiring an interest or increasing an existing interest or shareholding in a non-German partnership or other (corporate) entity is obliged to notify the German tax authorities within one month of the acquisition or increase of an existing interest or shareholding in any such entity (subject to some de minimis exemptions). Such reporting obligations also apply to investments in non-German fund vehicles organised in such a legal structure. It will therefore be of relevance, for example, to US or offshore hedge funds, private equity funds or any other private fund organised as a partnership, corporation or similar entity (e.g., as a trust). The Tax Circular states that such tax reporting obligations may also be fulfilled by such non-German entity. If such non- German entity, however, does not itself fulfill such tax reporting obligations, as a default provision, they will be deemed to be vested with the German tax resident.

If such tax reporting obligation is not complied with, it may lead to a penalty charge by the German authorities.

From a practical perspective, this new Tax Circular may be of relevance to non-German private funds that should either (i) include in their fund documents an obligation at the investor level to comply with such tax reporting obligations, or (ii) include in the subscription documents a representation by their (German tax resident) investors that they comply with such tax reporting obligations.

In this context, the Tax Circular also confirmed the prevailing view among German tax practitioners that any non-German partnership with two or more German tax resident investors has to report and file with the German tax authorities a partnership tax return in accordance with German tax law. In practice, for example, US Schedule K-1's are used as a basis to report and file German partnership tax returns. In subscription documents (including side letters) with German tax resident investors, the scope and costs of such tax returns are typically negotiated.

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