Tax Treatment of PE Funds (Measure 1.33)
The Federal Government is examining a modernization of the tax treatment of private equity funds with the aim of ensuring the international competitiveness of German PE investors and establishing a legally certain solution that prevents abusive applications and complies with EU state aid law. Although the Strategy does not specify the exact scope of this modernization, it clarifies that a fund organized as a partnership will not itself be a separate taxable entity for income tax purposes, and that no trade tax will be levied on activities consisting solely of asset management.
In our view, another positive aspect is the statement regarding the currently existing partial tax exemption for carried interest (profit-based compensation) under Section 3 No. 40a of the German Income Tax Act (EStG) (partial income procedure with a 40% tax exemption), which is intended to make it more attractive for fund sponsors to establish themselves in Germany. It can therefore be assumed that this tax exemption will remain unchanged.
The question remains as to what specific steps the Federal Government intends to take toward modernization. In our view, the first and most important step is to establish legal certainty for the launch of private asset management funds. The key instrument for this is the revision of the so-called Private Equity Decree (BMF letter dated December 16, 2003, IV A 6 – S 2240 – 153/03, BStBl I 2004, 40). Modernizing this decree is purely an administrative matter: it requires no legislative process, is revenue-neutral since it merely clarifies the existing distinction between asset management and commercial activity and does not create any new tax benefit and could be implemented by the Federal Ministry of Finance (BMF) with immediate effect.
The Federal Government has now acknowledged that action is needed here. During the legislative process for the Location Promotion Act (StoFöG), it had rejected a statutory provision to distinguish between private asset management and commercial private equity funds, arguing that the Private Equity Decree already provided a legally certain and clear framework. By now “examining” a modernization in Measure 1.33, the Federal Government implicitly acknowledges that this guidance is insufficient.
And in fact, the decree – now more than 20 years old – no longer provides the legal certainty attributed to it: the Federal Fiscal Court (BFH) (judgment of August 24, 2011, I R 46/10) already expressed doubts, in an obiter dictum, as to whether meeting all the decree’s criteria reliably ensures that an activity constitutes private asset management. At the same time, tax audits have shown that the decree leaves room for interpretation and does not address key features of modern PE/VC practice with sufficient specificity. The result is legal uncertainty, leading to a “flight” toward commercial classification with all the associated competitive disadvantages, particularly vis-à-vis Luxembourg as a fund location.
This measure must also be viewed in the context of the recently enacted Location Promotion Act (in effect since February 10, 2026), which addressed the investment fund and special fund level, including through safe-harbor provisions in Section 6(5a) of the Investment Tax Act (InvStG) and expanded special fund eligibility for investments in closed-end or commercial target funds (Section 284 of the Capital Investment Act (KAGB)). The framework conditions for private asset management partnerships as the market standard for PE funds were not addressed in this context. Measure 1.33 is thus the announced follow-up fix for precisely the gap that the legislature deliberately left open in the StoFöG.
To enable internationally competitive structures in Germany as well, it must follow the example of leading fund jurisdictions such as Luxembourg, the United Kingdom, and the United States and establish taxation solely at the investor level. This would also give Germany the opportunity to partially offset its declining industrial significance by enhancing its appeal as a financial center — and perhaps Germany’s most important sovereign wealth fund would then no longer structure its next investments in Luxembourg or Ireland, but in Germany instead.
Secondary Market for VC/PE Fund Interests (Measure 1.29)
The Federal Government is advocating at EU level for the establishment of a sandbox pilot framework to develop an institutionally oriented secondary market for VC/PE fund interests. The goal is to strengthen secondary liquidity and facilitate capital commitments from institutional investors. This is particularly relevant for the exit process and liquidity management within fund portfolios. This still vaguely worded policy declaration of intent is certainly well-meant; however, its practical relevance remains to be seen in light of the steadily growing, already-existing informal secondary market.
Reform of Solvency II (Measure 1.13)
The revised Solvency II Directive (published in the EU Official Journal in January 2025) makes it easier to classify investments as “long-term equity investments.” Provided the requirements are met, venture capital investments will also benefit from a reduction in capital requirements from 49% to 22%. Insurance companies acting as LP investors will thus have significantly more flexibility to allocate capital to VC funds. National implementation will be carried out through the Insurance Reorganization, Resolution, and Supervisory Amendment Act, which is currently still undergoing the legislative process. The law is expected to take effect at the end of January 2027.
Reduction of the Minimum Holding Period (Section 6b of the EStG (Measure 1.32)
A reduction of the minimum holding period under Section 6b(4) No. 2 of the EStG from six to four years is under consideration. The goal is to make investments in young companies more tax-attractive and to strengthen exit channels. For investors with agricultural, forestry, or commercial business assets who structure VC investments via Section 6b EStG, this would represent a significant relief.
Improvement of Loss Offsetting on Equity Acquisitions (Section 8d of the Corporate Income Tax Act (KStG)) (Measure 1.37)
The potential for improving the application of Section 8d of the KStG is being examined. This provision prevents unused losses from being forfeited in the event of a detrimental equity acquisition, provided the corporation continues its business operations essentially unchanged and the losses cannot be utilized elsewhere. The goal is to facilitate loss offsetting in connection with equity acquisitions. This may be particularly relevant for PE investors in the context of buy-and-build strategies and the restructuring of portfolio companies.
Outlook
The Federal Government has announced that it will pursue implementation of the 152 measures within the current legislative period and report annually on progress. Several of the regulations relevant to fund sponsors and investors are still under review (in particular, the tax treatment of PE funds and the minimum holding period under Section 6b EStG). Further legislative initiatives are expected in this area, which we will continue to monitor for you. All measures remain subject to the availability of budgetary funds and compatibility with EU state aid law. An early adjustment of existing structures may be advisable in individual cases.