Critical decision factors for an investment into closed-end funds

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Critical decision factors for an investment into closed-end funds

On the occasion of a risk diversified investment strategy but also for reasons of pensions investors often have to take decisions of an investment into a closed-end fund. Usually in such a case, a limited partnership is founded with the purpose to acquire special kinds of assets, for example real estate, plans, ships or containers. Such an asset is hold and rented by the partnership for a certain time period, regularly at least 10 years. After this period the asset will be sold by the company to a third party. For reasons of financing the acquisition of the asset, funds are collected from the interested investors as the future limited partners of the company. The limited partners are hold liable for their contribution agreed on. In case of a default of the investment a total loss of the contribution can arise. This means that the invested money can be completely get lost. However, there is no obligation which is agreed on in the partnership agreement of the limited partner to finance further funds.

Under economical aspects the fund prospects to the investors periodic payments of dividends. However, in this context it has to be taken into account, that generally the dividend policy of the fund provides only the initial capital payment of the investor or parts of it for continuous repayments during the lifte time of the closed-end fund. These capital repayments have no tax effect for the investor which means that the payment will not be taxed as fiscal income. However, every capital repayment does increase the amount of the future capital gain resulting from the sale of the asset hold by the closed-end funds („exit“). 

Apart from the prospected further capital gain as consequence of the exit which could be even so subject to various financial risks, the investor should also consider other aspects for his investment decision. These include not only the life time of the fund, but also the potential requirement of an agio payment, the amounts of provided periodic dividends as well as the calculated annual cost of the management of the fund. The latter case concerns also the external fees of the tax advisor, various lawyers and the public certified accountant of the fund. Additionally, the investor has to consider, that during the life time of the close-end fund the exit of a limited partner from the partnership on the basis of the fair value of the participation ist generally not possible. Even so a second hand market for funds participation does exist, frequently, a sale without any relevant discount is not possible. As a consequence, the original capital payment is bound de facto to the partnership over the whole life time of the fund. 

It is normally recommend to involve a certified public accountant, a tax advisor or a specialized lawyer to check the investment before signing the partnership agreement. This includes especially the essential points of the shareholder agreement (e.g. succession plan rule, tax character of the fund) but also the reliable calculation of the economics of the fund with special regard to the advantageousness e.g. in relation to the investments in traded stocks.

Reclaim of a gift

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Reclaim of a gift

(German Federal Supreme Court, X ZR 107/16)

 

The legal difficulties of a donor, which could arise in context with the reclaim of a gift, have been subject to a current decision of the German Federal Supreme Court  – „BGH“ – (BGH, X ZR 107/16):

 

I. Facts

A couple had given to their daughter and her partner an amount of 104.000 Euro for the joint acquisition of an apartment in the year 2011. At that time, the relationship of the young people had already existed for 9 years and it seemed to be staple for the future. Contrary to expectation, the relationship broke down two years later. Saying that, the parents reclaimed half of the gifted amount from the former partner of their daughter.

 

II. Decision of the German Federal Supreme Court

Clarifying, in its decision the BGH points to the fact, that a donation, which is not explicitly agreed on under the correct usage of a legal reservation, generally cannot be reclaimed. The reason for that is, that the donation has been given to a person as a unilateral contribution and not because of a compensation agreed on. For the assumption of the legal criterion „gross ingratitude“, the simple dissolution of the relationship with the child of the donors is not sufficient. However, it is possible within narrow bounds to appeal on the legal institute of the „ceasing of the base of the transaction“. On this legal basis one of the involved party could reclaim the rescission of the original gift agreement, even when relevant circumstances have changed, which have not been made a legal part of the former agreement but which have been decisive for the conclusion of this agreement. In any case one of the parties can rely upon the institute when the dissolution of the relationship had appeared already shortly after the donation. However, the appeal on the legal institute „ceasing of the base of the transaction“  is not possible, when the broke of the relationship happened many years later after the donation was made. 

 

III. Recommendation 

Very often a donation between private persons is agreed on without any written document and without any consultation by a professional advisor. Generally, it has to be recommend to discuss the intended donation with a lawyer who is also familiar with the relevant tax issues. This includes especially a statement to the tax effects of the donation as well as a proposal for individual reserve clauses which have to be agreed on to avoid a risky and expensive confrontation outside and within the court.

 

Dr. Michael Knittel

LAWYER CERTIFIED SPECIALIST

TAX ADVISOR CERTIFIED PUBLIC ACCOUNTANT

Maximilianstraße 22, D-67346 Speyer

Tel. (06232) 679 52 55    Fax (06232) 679 52 45

info@kanzleiknittel.de   

www.kanzleiknittel.de

Family company

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Advantages of a family company 

The purpose of a family company is to hold family property, especially real estate, with a long term horizon within the family unit. Such a family company (e. g. a real estate family company) is usually structured as a partnership, especially as a limited partnership („KG“) or a „GmbH & Co KG“.

In such a case there is no real estate taxation for transferring the real estate into the company. Moreover, the taxable income of the real estate will be allocated directly to the taxable income of the limited partners of the family partnership. If contrary to expectation the family shareholders do not  want be bound anymore within a family unit, the shares or the real estate can be transferred in general tax free after the expiry of a period of ten years of holding the real estate to a new shareholder or buyer. The annual dead line does not apply to assets other than real estate, e. g. shares held by the family company in a custody account. In such a case every sale of the shares will taxed on the realized profit or loss.

The shareholder agreement is the essential part of the family partnership. Saying that, the contract requires a very careful shaping. Every ruling of the agreement should be discussed intensively by the shareholders involved to reach an unanimous consent if possible. This refers to a range of issues and includes not only but especially the ruling of withdrawal of profit by the partners, succession planning as well as financial compensation in case of leaving or even exclusion from the family partnership.

Also a very important aspect of a family partnership is that there is no need for a notarial certification with regard to the shareholder agreement respectively an amendment of the agreement. as well as the transfer of shares of the limited family partnerships to other or new partners. This is even the case where reals estate is hold by the family partnership. Therefore, an essential cost factor for the company structure can be excluded.

The family partnership is a very good instrument to promote the family ties. However, the individual aspects of every family member have to be considered. This includes primarily age, family situation and profession. 

 

Dr. Michael Knittel

LAWYER  CERTIFIED SPECIALIST

TAX ADVISOR  CERTIFIED PUBLIC ACCOUNTANT

Maximilianstraße 22, D-67346 Speyer

 Tel. (06232) 679 52 55    Fax (06232) 679 52 45

info@kanzleiknittel.de   

www.kanzleiknittel.de