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 > > > 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 > > > 04 05 FINANCE&INVESTMENTBRIEFING FINANCE&INVESTMENTBRIEFING  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 Hamburg gbartsch@wfw.com +494080803440  Thierschplatz6  80538Munich  Germany   Tel: +49892370860 Fax:+4989237086222 Germany  AmKaiserkai69  20457Hamburg Germany   Tel: +494080803440 Fax:+4940808034410 wfw.com  Allreferencesto ‘ Watson,Farley&Williams ’ and ‘ thefirm ’ inthisbrochuremeanWatson,Farley&WilliamsLLPand/oritsaffiliatedundertakings.Any referencetoa ‘ partner ’ meansamemberofWatson,Farley&WilliamsLLP,oramemberoforpartnerinanaffiliatedundertakingofeitherofthem,or anemployeeorconsultantwithequivalentstandingandqualification.  ThisbrochureisproducedbyWatson,Farley&Williams.Itprovidesasummaryofthelegalissues,butisnotintendedtogivespecificlegaladvice.The situationdescribedmaynotapplytoyourcircumstances.Ifyourequireadviceorhavequestionsorcommentsonitssubject,pleasespeaktoyourusual contactatWatson,Farley&Williams.  Thispublicationconstitutesattorneyadvertising.  © Watson,Farley&Williams2012  100‑000‑1450HAMKWKW18/07/2012 Contact  . 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 > > > 02 03 FINANCE & INVESTMENT BRIEFING FINANCE & INVESTMENT BRIEFING Structure  The . foreignportand the HighSeasduring more Watson,Farley&Williams July2012 > > > 04 05 FINANCE & INVESTMENT BRIEFING FINANCE & INVESTMENT BRIEFING  b.