GERMANY – The German government is considering taxing the earnings of locally domiciled private equity funds, according to business daily Handelsblatt.

Citing unnamed government sources, the paper said the finance ministry was considering the move to help finance a planned corporate tax reform.

Germany’s “grand coalition” of Conservatives and Social Democrats has pledged to reduce corporate taxes from around 36% currently, yet no action on this is expected before 2008.

Handelsblatt said that under the plans, private equity funds and fund-of-funds domiciled in Germany would be taxed. It added that that this would put Germany at a huge competitive disadvantage against Luxembourg, the US, the UK and even France, where tax exemptions apply to private equity funds.

“If this goes ahead, it would mean the end of private equity in Germany,” an unnamed chief executive of a German private equity fund was quoted by Handelsblatt as saying.

“No investor in Germany would tolerate such a move. International pension funds would avoid Germany and private equity houses in Germany would move abroad,” added other unnamed critics from the sector.

However, the finance ministry firmly denied that it was actively considering taxing private equity funds in Germany. “We are not working on concrete plans that go in this direction,” a spokesman for the ministry said in Berlin.

The Handelsblatt article sharply contrasts with previous statements from the Conservative CDU/CSU and SPD parties. When they formed their grand coalition last November, they promised legislation to boost private equity in Germany.

According to an association for Germany-based private equity funds, the BVK, its members have €114bn invested in more than 5,500 companies.