A large number of German municipal infrastructure projects were in the past structured as project financings with the investors being high net worth individuals who benefited from tax reductions offered by depreciation allowances.
The new tax legislation passed by the Social Democrat/Green parliament and in force since spring of this year has substantially reduced the tax benefits available to investors by limiting the tax deduction by offsetting positive income of the investors with the negative income realised through the depreciation allowances from the projects. In concrete terms the law limits the tax deduction between different sources of income to certain amounts and a proportionate part of the income and excludes completely any tax deduction for losses resulting from so-called loss allocation companies being set against investors' other positive income.
A loss allocation company is defined as a company where the participation is motivated by the allocation of losses and the resulting tax deductions. Tests have been established to determine whether this is the prevailing notarization of the investors in such company. As a consequence the number of newly established transactions involving the above described structures for municipal infrastructure projects has significantly decreased, while the market is developing alternative structures, in many cases concentrating less on the tax advantages but to a greater extent on potential profits arising from the operational phase of the project.
For further information on this topic please contact Ulrich Mannsfeldt at Freshfields Bruckhaus Deringer by telephone (+49 69 27 30 80) or by fax (+49 69 23 26 64) or by e-mail ([email protected]).
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