FG Niedersachsen on Carried Interest in Private Equity Funds
By judgment of 7 May 2026, Finanzgericht Niedersachsen (FG Niedersachsen, Lower Saxony Fiscal Court) held that carried interest agreed in the partnership agreement of a private equity fund company is not subject to VAT under the conditions examined there. The decision concerns the distinction between a non-taxable contribution to the company’s success and a taxable exchange of supplies.
The case concerned a so-called liquidation carry. It was structured disproportionately to capital and arose only once a minimum return on the invested capital had been achieved. According to the court’s decision, this constituted a participation in the company’s economic success and not separate remuneration for a supply subject to VAT.
The judgment is final. It has been published, among others, as FG Niedersachsen, judgment of 7 May 2026 – 5 K 100/25, BeckRS 2026, 19235, and under WKRS 2026, 19806.
Facts: GmbH as Managing Limited Partner
Remuneration Structure Under the Partnership Agreement
The claimant was a GmbH (German limited liability company) in the position of managing limited partner of a private equity fund company. In addition to the disputed carried interest, the partnership agreement also provided for fixed remuneration, the VAT liability of which was not disputed between the parties.
The contractual provisions included activity-based remuneration for the limited partners. This amounted to 0.5% per year of the company’s fixed capital and was provided for irrespective of the annual result.
In addition, a liquidation carry had been agreed. This amounted to 20% of the increase in value exceeding the invested capital, including a minimum annual return of 9%. The participation therefore applied only once the so-called hurdle rate had been exceeded.
Position of the Tax Office
The Finanzamt (tax office) treated the carry as consideration for an “expertise service” provided by the claimant. In doing so, it relied, among other things, on know-how and brand. From the tax office’s perspective, the carried interest should therefore be subject to VAT.
FG Niedersachsen did not follow this classification. It did not consider the liquidation carry to constitute an exchange of supplies within the meaning of VAT law.
No VAT in the Absence of a Direct Link to a Supply
Carried Interest as Participation in the Company’s Success
According to the decision of FG Niedersachsen, carried interest agreed in the partnership agreement, structured disproportionately to capital and arising only after a minimum return has been achieved, constitutes participation in the company’s success. In the court’s assessment, it does not constitute separate remuneration.
For separate remuneration to be subject to VAT, a direct link between a specific supply and the payment would be required. In the court’s view, this link was absent because the payment was not based on the nature and scope of a specific activity.
Rather, the decisive factor was that the amount of the carry depended exclusively on the company’s overall economic success. This overall success was influenced by factors such as market conditions, valuations and exit conditions and was therefore contingent.
Hurdle Rate Did Not Change the VAT Assessment
In the court’s view, the fact that the carried interest arose only after the hurdle rate had been exceeded did not lead to a different assessment. The decisive point remained that the payment was not calculated according to the nature and intensity of the claimant’s activity.
According to the decision, performance dependency alone was not sufficient to give the payment the character of consideration for a supply. Even a structure dependent on economic success therefore did not make the carry consideration for a taxable supply.
Distinction From Fixed Remuneration Subject to VAT
The court distinguished the disputed liquidation carry from the fixed remuneration additionally provided for in the partnership agreement. In the proceedings, it was undisputed that this fixed remuneration was subject to VAT.
The following points in particular were significant for the VAT assessment:
- The carry arose only after an agreed minimum return had been achieved.
- The amount was determined by the overall economic success of the fund company.
- The payment was not linked to the nature, scope or intensity of a specific supply by the claimant.
- Market, valuation and exit conditions influenced the economic success.
- Mere performance dependency did not establish a direct link to a supply.
It therefore remained classified as a profit participation caused by the corporate relationship. According to the decision, there was no exchange of supplies subject to VAT.
Capital-Proportionate Share of Liquidation Proceeds
According to the official headnote, both the carried interest and the managing limited partner’s capital-proportionate share of the liquidation proceeds are not subject to VAT. The court also classified the capital-proportionate share of the remaining liquidation proceeds as a general profit participation.
It was therefore likewise not consideration for a taxable supply. In this respect as well, the VAT assessment was based on the fact that there was no consideration for a specific supply.
Significance of the Decision for Private Equity Structures
The decision concerns the VAT classification of carried-interest arrangements in private equity fund companies. The central issue is whether a success-based payment is to be classified as a profit or success participation under company law or as consideration for a specific supply.
FG Niedersachsen focuses in this context on the direct link to a supply. If there is no calculation based on the nature and scope of a specific supply and the payment is instead based exclusively on the company’s overall economic success, then, according to the decision, there is no exchange of supplies subject to VAT.
The decision concerns the specifically decided liquidation carry and the contractual structure in that case. It cannot readily be generalised to different contractual models.
Frequently Asked Questions
FG Niedersachsen Carried Interest Private Equity Fund Subject to VAT?
FG Niedersachsen held that the liquidation carry governed by the specific partnership agreement is not subject to VAT. It regarded it as participation in the company’s success and not as separate remuneration for a taxable supply.
Why Was the Liquidation Carry With a 9 Percent Hurdle Rate Not Taxable According to FG Niedersachsen?
In the court’s view, the direct link to a supply was absent because the carry was not based on the nature and intensity of the claimant’s activity. The only decisive factor was the company’s overall economic success.
What Practical Consequences Does Judgment 5 K 100/25 Have for Companies With Carried-Interest Arrangements?
The decision makes clear that the VAT classification of carried interest depends on the specific structure set out in the partnership agreement. In particular, it may be relevant whether a payment is structured as a success participation or appears to be consideration for a specific supply.
Tax Classification of Carried Interest
Carried-interest arrangements regularly raise complex issues of taxation and partnership agreement structuring. The decision of FG Niedersachsen shows that the distinction between a success participation under company law and a taxable exchange of supplies must be examined carefully in each individual case. MTR Legal Rechtsanwälte supports companies, investors and high-net-worth private individuals with tax law issues in connection with fund structures and participation models; further information can be found under legal advice in tax law.
