Germany: Federal Court Of Finance Judgement On Carried Interest From Business-Type Private Equity Funds

The German Federal Court of Finance (Bundesfinanzhof – "BFH") revealed its position on the tax treatment of carried interest from business-type fund structures in a judgement of 11 December 2018 (VIII R 11/16).

Executive Summary

  • Carried interest from business-type private equity funds generally will not be treated as a service remuneration.
  • Rather, the so-called partial income regime applies to those parts of the carried interest which (on a "look-through" basis) are gains from the sale of shares in corporations (capital gains) and dividends, meaning that such parts of the carried interest income are 40% tax exempt.
  • This treatment also applies to private equity funds which are business-type not due to trade or business activities, but only due to their legal structure (so-called deemed-business treatment) or due to an interest they hold in another trade or business partnership (so-called business-tainting).

A. Background

Different views were taken in the past on the question of the tax qualification of carried interest.

Initially, carried interest was regarded as a disproportionate share of income so that the taxation of the carried interest followed the taxation underlying items of income (capital gains, dividends, interest). With the so-called PE Pronouncement (Pronouncement of the German Federal Ministry of Finance of 16 December 2003, Federal Tax Gazette I/2004, page 40, section 24 et. sq.), the tax authorities took the view that carried interest from a non-business private equity fund should be requalified to a (hidden) service remuneration.

In 2004, the view taken by the tax authorities was codified in § 18 (1) no. 4 of the German Income Tax Act ("ITA"). Pursuant to this statutory rule, carried interest received by a partner of a non-business private equity fund is qualified as income from self-employment and thus generally fully taxable. However, a special tax exemption was created at that time, pursuant to which 40% of such income is tax free (partial income regime, § 3 no. 40a ITA).

However, the question remained in dispute how carried interest should be treated in case of a private equity fund qualifying as trade or business.

In some instances, tax offices took the view that carried interest should be qualified as a (hidden) service remuneration also for business-type private equity funds. However, according to this view the partial income regime applicable to non-business private equity funds should not apply so that the carried interest was regarded as fully taxable.

Other commentators regarded the carried interest from business-type funds still as an item of income, and not as a (hidden) service remuneration.

Moreover, it was not clear whether a private equity fund which only qualified under the deemed-business rules should be regarded as non-business (and hence qualify for the application of the partial income regime) or as a business-type fund.

B. Key Statements of the BFH Judgement

In its judgement of 11 December 2018 the BFH ruled that the carried interest from a business-type private equity fund is not a (hidden) service fee, but rather a disproportionate share of income. As a consequence, the partial income applies insofar as the carried interest is comprised of capital gains or dividends. This does also apply to private equity funds which are deemed-business or business-tainted only.

The basis of the BFH judgement was a case in which a deemed-business carry pool held interests in several deemed-business private equity funds. The tax authorities regarded the carried interest at the level of the carry pool as a service remuneration and denied the applicability of the partial income regime. This was overruled by the BFH.

According to the BFH, the carry pool received business-type income from the private equity funds, given that the carry pool as well as the private equity funds were partnerships qualifying for business treatment.

The BFH did not agree to a requalification of the carried interest to a service fee. The relevant rule of law (§18 (1) number 4 ITA) requires a "non-business partnership". Partnerships which are deemed-business or business-tainted, however, are not "non-business partnerships" in this sense.

Furthermore, the BFH held that even under the general rules there was no reason that the carry pool received a service remuneration rather than a share of income. A service fee from trade or business requires that payments are made on a contractual basis and not on the basis of a partnership agreement (e.g. treatment of the fee as expenses at the level of the partnership or payment independent from the profit or loss of the fund partnership). In the case decided by the BFH, however, carried interest was part of the allocation of income, so that it was not regarded as a (hidden) service remuneration payable irrespective of profits or losses.

However, the partial income regime applies according to the general rules insofar as the carried interest (treated as a share of income) results from capital gains or dividends.

C. Observations / Outlook

The judgment of the BFH is helpful as it clarifies that carried interest received from a business-type private equity fund is not qualified as a (hidden) service remuneration, but as a share of income.

This means that the partial income regime applies also to business-type private equity funds insofar as carried interest is comprised of capital gains from the sale of shares in corporations and dividends.

If carried interest from a business-type private equity fund is received by a corporation, this should also lead to the applicability of the 95% tax exemption pursuant to § 8b of the German Corporate Income Tax Act, insofar as the carried interest stems from capital gains..

It is still an open question whether the judgment will have an impact on the taxation of carried interest from non-business private equity funds. It seems that the BFH will uphold the current rules (requalification into a service remuneration, application of the partial income regime).

The judgment of the BFH has not been published in the Federal Tax Gazette yet and thus is not binding for the tax authorities. It is not yet clear which position the tax authorities will take on this judgment.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions