With effect from 1 January 2020, the law introducing an obligation to report cross-border arrangements (BGBl. I 2019, p. 2875) entered into force. The law implements the Directive (EU) 2018/822 of 25 May 2018 amending the Directive on Administrative Cooperation (DAC 6) into German law and may result in an obligation of so-called intermediaries and relevant taxpayers to report cross-border arrangements to the Federal Central Tax Office (Bundeszentralamt für Steuern - BZSt).
The following provides an overview of the key elements and the impact of the implementation legislation on private equity and venture capital funds.
- Cross-border arrangements must be reported to the BZSt as of 1 July 2020. Pre-existing arrangements (first step of implementation was realised after 24 June 2018) must be reported retroactively within two months after 30 June 2020.
- Both the PE or VC fund itself and portfolio investments of the fund may, in certain cases, constitute a cross-border arrangement. Typically, the fund manager will be regarded as intermediary and, therefore, will be obliged to report the cross-border arrangement to the BZSt.
- By investing in a PE or VC fund, investors generally are relevant taxpayers of the arrangement. The fund manager must provide the registration number and disclosure number assigned by the BZSt to the investors. Both numbers must be included in the investors' tax returns.
- The involved legal or tax advisors can also report to the BZSt on behalf of the fund manager or the investor, provided there is a waiver of their professional privilege of confidentiality.
A. Overview of the Most Important Changes
1. Personal Scope
In general, the reporting obligation is imposed on the so-called intermediary. An intermediary means any person that markets, designs, organises or makes the arrangement available for implementation or manages the implementation for third parties.
In some cases, the reporting obligation may also be applicable to the relevant taxpayer of a cross-border arrangement. This is especially the case if the relevant taxpayer has designed the arrangement for itself or there is no intermediary resident in Germany or the EU. Furthermore, the relevant taxpayer is obliged to submit the report if the intermediary is subject to a professional privilege of confidentiality (e.g. in case of legal and tax advisors) and the relevant taxpayer does not provide a waiver to the intermediary from its professional privilege of confidentiality.
2. Definition of Cross-border Arrangement
There is a comprehensive definition of cross-border arrangement. The most important requirement for a cross-border arrangement is that a so-called hallmark is fulfilled. In some cases, in addition to the hallmark, a tax advantage must be one of the main advantages of cross-border arrangement (main-benefit test).
The new law contains an exhaustive list of various hallmarks that indicate a cross-border arrangement. However, it is sufficient if only one of the hallmarks is met. These hallmarks include, for example:
- the agreement of a confidentiality clause prohibiting the disclosure of the cross-border arrangement to other intermediaries or the financial authorities;
- an arrangement that has a substantially standardised documentation or structure and is available to more than one relevant taxpayer without a need to be substantially customised for implementation;
- an arrangement that has the effect of converting income into capital, gifts or other categories of revenue which are taxed at a lower level or exempt from tax;
- an arrangement that gives relief from double taxation in respect of the same item of income or capital in more than one jurisdiction; and
- specific arrangements concerning transfer pricing.
The new law does not cover cross-border arrangements which are solely concerned with VAT or customs duties.
3. Aspects of the Reporting Procedure
Cross-border arrangements must be reported to the BZSt in electronic form. Depending on the number of notifications, the "BZStOnline-Portal" (www.elster.de/bportal/start) can be used for this purpose. For a large number of notifications, the BZSt will provide an electronic interface for mass data ("ELMA").
Persons that are subject to the reporting obligation and do not already have a login to the BZStOnline-Portal – for example for the transmission of data in accordance with FATCA or the so-called Common Reporting Standard (CRS) – should apply for the reporting procedure in February 2020 and register with the BZStOnline-Portal in April 2020.
Once the cross-border arrangement has been reported, the BZSt assigns a registration number to the cross-border arrangement and a disclosure number to the respective reporting. Then, the BZSt issues these numbers to the intermediary.
The intermediary must forward the assigned numbers to the respective relevant taxpayer, as the relevant taxpayer must state both numbers in his respective tax returns.
Thus, on the one hand, the new reporting obligation pursues a tax policy purpose, as the legislators of the EU member states get informed about market developments at an early stage. On the other hand, it also serves an administrative purpose, as it enables the relevant tax authorities to carry out a more precise tax field audit.
4. Filing Deadlines
The reporting obligation commences as of 1 July 2020. The relevant effective date is 30 June 2020, i.e. all cross-border arrangements (i) which are made available for implementation after that date, (ii) for which the relevant taxpayer is ready for implementation after that date, or (iii) for which the first step of implementation has been made after that date must be reported. The reporting must be submitted within 30 days.
However, it should be noted that the new reporting obligation also applies to pre-existing cross-border arrangements. This includes cross-border arrangements whose first step of implementation was realised after 24 June 2018 and before 1 July 2020. All such arrangements must be reported within two months from 30 June 2020.
B. Impacts on Private Equity and Venture Capital Funds
The new reporting obligation for cross-border arrangements has an extensive impact on German fund managers and investors of private equity and venture capital funds. However, any reporting to the BZSt, if applicable, may be made by the involved legal or tax advisors on behalf of the fund managers or investors.
1. Reporting Obligation for Fund Managers
Fund managers must note that the fund vehicle of a private equity or venture capital fund may qualify as cross-border arrangement already during the fundraising. A German fund manager will typically be regarded as intermediary and, thus, is obliged to report the cross-border arrangement (including information on investors) to the BZSt. The fund manager must then forward the registration and disclosure number assigned by the BZSt to the investors.
Depending on the structure and financing, a portfolio investment may also constitute a cross-border arrangement within the meaning of the new reporting obligation. However, to determine this, each portfolio investment needs to be examined on a case-by-case basis. If a portfolio investment actually qualifies as reportable cross-border arrangement, the German fund manager, in its capacity as an intermediary, is obliged to file the respective reporting to the BZSt. In this case, the relevant taxpayer of the cross-border arrangements is the fund vehicle, even if it is a (foreign) partnership or a (foreign) contractual-type fund.
Fund managers from other EU member states should be subject to a similar reporting obligation to the competent tax authority of the respective EU member state.
Since the new law does not (yet) provide for a reporting obligation for entirely domestic structures, the fund manager is not obliged to provide a reporting in case of a German fund vehicle with Investors merely resident in Germany. The same applies if such fund makes portfolio investments in Germany only.
2. Implications for Investors in PE and VC Funds
German investors who invest in private equity or venture capital funds may be relevant taxpayers of a cross-border arrangement. In this case, a side letter clause should be agreed upon with the fund manager prior to the investment according to which the fund manager is obliged to report the cross-border arrangement and to forward the registration number and disclosure number assigned by the BZSt or the competent tax authority of another EU member state to the investor.
With regard to the portfolio investments of the fund, not the investor but the fund vehicle is generally considered as the relevant taxpayer. Thus, the investors should not be subject to any reporting or documentation obligation.
Investments in a fund the fund manager of which is not resident in the EU are of particular relevance to German investors. If the intermediary is neither domiciled in Germany nor obliged to report the cross-border arrangement in another EU member state, the reporting obligation is with the relevant taxpayer, i.e. the investor. Therefore, in the case of US fund programmes the reporting obligation should typically be vested in the investors.
3. Reporting by (Legal) Advisors
However, the reporting may also be made by the involved legal or tax advisors.
If fund managers or investors seek advice from legal or tax advisors, typically, the advisors qualify as intermediaries as well. However, due to the professional privilege of confidentiality, legal and tax advisors are only partially obliged to report cross-border arrangements to the BZSt. With respect to the remaining information, the reporting obligation remains with the fund manager or, if applicable, the investors.
If the fund manager or the investor releases the advisors from their professional privilege of confidentiality, the advisors may file a complete reporting to the BZSt. The fund manager or the investor, respectively, is released from its own reporting obligation if it can establish that another intermediary has already reported the cross-border arrangement. In this case, it is sufficient if the advisor provides the registration number and the disclosure number forwarded to the fund manager or the investor, respectively.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.