On 21 December 2016, the German insurance supervisory authority published a draft of its circular relating to investments by Solvency I insurers and certain pension schemes (the "Investment Circular"). From our point of view, the key statements remained the same when compared to the current version of the Investment Circular and, therefore, we intended to inform you of the final version of the Investment Circular only upon its publication. However, a lively debate has arisen regarding whether the draft of the new Investment Circular may have substantial impact on investments in private equity and debt funds. We would like to contribute to the aforementioned debate.

At the end of last year, the German Federal Government (Bundesregierung) initiated a draft bill to combat tax avoidance and to amend other tax provisions. At the center of the draft bill is the fight against the concealment of economic activities by means of companies domiciled abroad. The German Federal Council (Bundesrat) decided on its position on this draft and also took the opportunity to propose an amendment of the withholding tax rules for investment funds under the amended German Investment Tax Act applicable as of 1 January 2018 in order to prevent an unintended tax exemption for domestic real estate income in certain multi-level fund structures.

Shortly before Christmas 2016, the Federal Ministry of Finance issued the long-awaited administrative guidelines on the profit allocation for permanent establishments (profit allocation PE guidelines). The 186-page long guidelines intend to specify the application of the arm’s length principle for permanent establishments implemented into law in 2013 as Sec. 1(5) of the Foreign Tax Act (FTA). Furthermore, the guidelines comment on the regulations of the Permanent Establishments Profit Allocation Act (PEPAA) issued in this context in 2014 and applicable to business years commencing after December 31, 2014.