Hedge funds and Private Equity - PES

The EU has in the past tried to combat tax evasion. Rules of investment in tax havens have been
implemented but drafted in such a way that investments in hedge funds and private equity funds
are not fully included.
The combination of a limited partnership, which is not a taxable body in itself and its domicile in
an off shore financial centre, which is often a tax haven, means that the distribution of profit from
the hedge fund and the private equity fund to the investors are normally out of the control of the
tax authorities of the investor.
In nearly all member states of the EU, there is a system of joint taxation. Under the different joint
taxation regimes, the members of a group will have the right to be taxed as a group. In practice
this means that the holding company or holding companies of the target company will be taxed
in a group with the target company.
According to EC directive a holding company is not taxed on the profit of the subsidiary when it
holds 15 per cent of the subsidiary, and the subsidiary must not take withholding tax on the dividend
to such holding companies.
If the investments in the subsidiary are financed by debts, the holding company will pay interest,
and it will have a negative taxable income – a tax loss. But this tax loss will be part of the joint
taxation with the target company and be offset in the taxable profit of the target company and it
will by this means reduce the corporate tax burden of the target company. Because of the
interest expenses of the target company and the interest expenses of the holding companies,
which takes part in the group taxation, the corporate tax burden of the target company can be
reduced significantly or even to zero.
In the case study of TDC it is described how one conservative estimate suggests that the
Danish government will lose some EUR 270m in tax revenue.
The target company, which is forced to pay for many of the costs of the take over, will try to
deduct these expenses, in reality the expenses of the purchasing private equity funds, from its
taxable income.
A holding company or an equity fund does not normally pay VAT. But some part of the expenses
(adviser’s fee etc) will be VAT-included. By letting the target company – which is normally paying
VAT – pay the expenses of the take over, the target company will reduce its VAT obligation by the
VAT paid on the expenses.
Part II – Six concerns about our European social market economy
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