Inheritance tax aspects in the valuation of private equity funds

The provisions of the German Inheritance Tax Act have been a matter of concern to the fiscal courts for many years, and recently also with increasing intensity to the Federal Constitutional Court. However, the legislator has not yet succeeded in creating a consensual inheritance tax concept.

On September 22, 2016, the Mediation Committee of the Bundestag and Bundesrat agreed on a compromise proposal on inheritance tax. The Bundestag confirmed the settlement proposal on September 29, 2016. The Federal Council will deal with the amended law on October 14, 2016.

Although the valuation of investments in private equity funds is not affected by this discussion, it is becoming increasingly important in day-to-day taxation practice. Shares in private equity funds are transferred by gift inter vivos or by inheritance. In the absence of explicit legal regulations on the valuation of (shares in) private equity funds, the consulting community is faced with a number of challenges, particularly in the case of a large number of private equity funds to be valued, although at least some of these also offer scope for design.

I. Essential principles of private equity
1. basic structure of a private equity fund

In a typical private equity fund, there are basically different groups of people involved. The investors provide the investment capital, the sponsors establish the private equity fund, and the company manages the individual private equity investments. The sponsors usually have only a small share in the capital of the private equity fund, but their share in the results is disproportionately large (so-called "carried interest"). In Germany, venture capital and private equity funds are regularly established in the form of a partnership (GmbH & Co. KG). However, the following principles apply analogously to foreign partnerships.

2. carried interest

The carried interest is a special component of the sponsors' profit participation and is regularly structured in the partnership agreements as a disproportionate profit share.