{"id":8609,"date":"2026-06-08T11:47:45","date_gmt":"2026-06-08T09:47:45","guid":{"rendered":"https:\/\/winheller.com\/blog\/en\/?p=8609"},"modified":"2026-06-08T11:47:46","modified_gmt":"2026-06-08T09:47:46","slug":"categorizing-carried-interest-germany-usa","status":"publish","type":"post","link":"https:\/\/winheller.com\/blog\/en\/categorizing-carried-interest-germany-usa\/","title":{"rendered":"Properly Categorizing Carried Interest Between Germany And The U.S."},"content":{"rendered":"\n

Carried interest payments are highly significant, particularly in international private equity and venture capital investments<\/a><\/strong>. As soon as fund structures are designed cross-border, or a relocation to another country (in our case: from Germany to the U.S.) is imminent, the question arises as to which country has the right to tax these payments<\/strong>. We explain why the correct categorization of the fund structure is crucial to answering this question.<\/p>\n\n\n\n

Carried interest as a share of profits in international tax law<\/h2>\n\n\n\n

Carried interest refers to the disproportionate share of profits<\/strong> that fund sponsors receive for their special contribution to the investment’s success. Although German law qualifies this profit share as income from self-employment, this is purely a domestic legal fiction. For international tax law, particularly the double taxation agreement<\/a><\/strong> (DTA) between the U.S. and Germany, this domestic regulation is not irrelevant. In fact, we believe that carried interest payments are not rooted in compensation for services, but rather in the partner status<\/strong> and the distribution of profits disproportionate to capital.<\/p>\n\n\n\n

Carried interest case law strengthens categorization as a profit share<\/h2>\n\n\n\n

German case law supports this assumption for cross-border scenarios<\/strong>. In several decisions, the Federal Fiscal Court (BFH) has clarified that carried interest payments from asset-managing funds must be treated as profit shares<\/strong> and not as compensation for services (BFH, judgment of April 16, 2024, VIII R 3\/21; BFH, judgment of December 11, 2018, VIII R 11\/16). Furthermore, the Schleswig-Holstein Fiscal Court expressly ruled that the domestic categorization under Section 18 of the German Income Tax Act (EStG) is not binding for the Germany-U.S. double taxation agreement. Instead, the actual fund income<\/strong> (which generally consists of capital gains, dividends, or interest) remains decisive<\/strong> (FG Schleswig-Holstein, judgment of October 8, 2024, 3 K 37\/22).<\/p>\n\n\n\n

Relocation to the U.S.: shift of taxation rights under the DTA<\/h2>\n\n\n\n

One of our clients was a German resident for many years and held interests in various Limited Partnerships (LPs) in the U.S. and the Cayman Islands. From a German perspective, these qualified as asset-managing partnerships<\/strong>, and the carried interest payments were taxable in Germany<\/strong>.<\/p>\n\n\n\n

However, after the client relocated to the U.S., the right to tax these profit shares shifted entirely to the U.S. under the U.S.-Germany DTA. Germany then only took them into account to determine the applicable tax rate (progression clause) because an unlimited tax liability continued to exist in Germany<\/strong>. The decisive factor for this outcome was that the LP structure was correctly categorized as an asset-managing partnership \u2013 a point that we always review comprehensively for our clients in practice.<\/p>\n\n\n\n

Special tax consequences for commercial partnerships<\/h2>\n\n\n\n

On the other hand, significant tax consequences<\/strong> can arise \u2013 particularly in connection with a relocation from Germany \u2013 if the structure is not an asset-managing partnership<\/strong>. This applies, for example, to a commercial entity or a company that generates commercial income within the meaning of \u00a7 15 EStG, or even an investment fund within the meaning of the German Investment Fund Act (InvStG):<\/p>\n\n\n\n