Mitigating tax risks on secondary transactions

Buyers and sellers on LP secondary transfers should always seek tax advice, including, where appropriate, advice in the relevant local jurisdictions to determine if transfer taxes or non-resident capital gains taxes (“NRCGT”) apply. It is essential to engage with the GP of the relevant fund early to provide sufficient time to carry out the due diligence required on the underlying investments and structure. Complex tax diligence may lead to increased GP transfer costs, particularly where the involvement of the GP’s own tax advisers is required. This cost must be weighed against the level of risk and broader commercial considerations, including timing. Sometimes (if not frequently), it will not be possible for the parties to determine with certainty ahead of closing whether NRCGT or transfer taxes apply. This may be due to insufficient information or engagement from the GP which has been exacerbated by increasing demands on GPs from the growing secondary transfer market or uncertainty in the applicable local law rules. Parties should factor such uncertainties into commercial discussions and allocate risk appropriately in the PSA.

In this article, we consider the risk of NRCGT and transfer taxes arising on secondary transactions, providing practical guidance for navigating these issues across key jurisdictions. This article does not seek to provide legal or tax advice.

What are NRCGT and transfer taxes?

Non-Resident Capital Gains Tax: Certain jurisdictions impose NRCGT on non-resident sellers if the interest being disposed of derives substantial value from assets in the relevant jurisdiction. NRCGT is usually assessed on the seller’s gain and can be collected by two mechanisms: (i) direct assessment on the seller, where the seller files a tax return and pays the applicable tax directly to the tax authority and/or (ii) withholding, where the buyer deducts a portion of the purchase price and pays such amount to the relevant tax authority. It is because of the potential obligation to withhold that, even though NRCGT is a seller tax, the buyer must also diligence whether NRCGT applies on the transfer.

Transfer Taxes: Transfer taxes are taxes which are paid on the transfer of property, which are typically assessed by reference to the consideration paid for the property. Most jurisdictions require the buyer to pay applicable transfer taxes.

Identifying Higher-Risk transactions

The nature of the fund’s underlying investments, portfolio companies and structure will determine whether any transfer taxes and NRCGT will arise on the transfer. Generally, transfer taxes and NRCGT are more likely to arise in the following situations:

• The fund holds more than 50% of its investments in a single jurisdiction;
• The fund’s investment strategy includes significant infrastructure/immovable property;
• The fund holds investments through alternative investment vehicles (“AIVs”), which often hold single portfolio investments concentrated in one jurisdiction;
• The fund invests in certain “higher-risk” jurisdictions, which we set out in more detail below; and/or
• The seller is resident in a jurisdiction without a broad network of double tax treaties (e.g. tax haven jurisdictions), limiting potential relief from NRCGT.

Whilst it is helpful to review the fund’s financial reporting and investor communications to understand the investment strategy of the fund and flag any of the situations described above which may warrant further investigation, sellers (as LPs in the relevant fund) are unlikely to hold sufficient details about the underlying investments to determine if any transfer taxes or NRCGT apply. Buyers and sellers will typically raise tax due diligence questions with the General Partner (“GP”) of the fund to determine the risk of transfer taxes and NRCGT, including asking about the fund’s structure, investments and any AIVs. However, since the GP’s role in the transfer process on an LP secondary transaction is usually minimal, the extent of the GP’s responses can vary.

If the diligence reveals a risk of NRCGT or transfer taxes, sellers will need advice on whether any exemptions are available or if relief can be obtained under an applicable double tax treaty.

Allocating risk in transaction documents

Given the potentially limited information available, it is rarely possible to exclude entirely the possibility of transfer taxes or NRCGT arising on an LP secondary transfer, so the purchase and sale agreement (“PSA”) will seek to allocate the risk. Formulations as to the risk allocation may include:

• NRCGT – Since NRCGT relates to the seller’s gain, NRCGT arising on the sale is typically an “Excluded Obligation” in the PSA with the result that the seller will bear the risk. The buyer will generally be permitted to withhold from the purchase price, without any gross-up obligation. Buyers and sellers should consider the applicable time limit on the “Excluded Obligations” in the PSA as tax authorities are likely to have several years to raise an inquiry and, particularly in the case of an LP secondary transfer, an NRCGT liability may only be assessed some time after the transfer (which may have occurred in a different jurisdiction altogether, i.e. the jurisdiction of the fund).
• Transfer taxes – Transfer taxes are often split 50:50 by the buyer and the seller in the PSA, on the basis that transfer taxes are a transaction cost, rather than relating specifically to either party.

Summary of higher-risk jurisdictions

The table below sets out a non-exhaustive list of “higher-risk” jurisdictions which could trigger NRCGT or transfer taxes on LP secondary sales. The table below is indicative only. The application of NRCGT and the headline rates indicated below might be mitigated or reduced by local exemptions or double tax treaty relief. For the jurisdictions flagged by an asterisk, we have included further detail on practical considerations below.

Practical advice for certain higher-risk jurisdictions

The descriptions below are intended as summaries of NRCGT and transfer taxes on LP secondaries and not a full analysis of the application of the relevant NRGCT or transfer tax rules in the applicable jurisdiction or legal or tax advice on any particular transfer. The application of NRCGT and the headline rates might be mitigated or reduced by local exemptions or double tax treaty relief.

U.S.

Section 1446(f)/ECI Withholding

Section 1446(f) generally requires buyers in an LP secondary of an interest in a fund which is treated as a partnership for U.S. tax purposes from a non‑U.S. seller who does not establish an exemption via an appropriate withholding certificate to withhold 10% of the “amount realized” on the transfer. Like other NRCGT collected via withholding, Section 1446(f) exists to enforce collection of the seller's tax under Section 864(c)(8) on effectively connected gain associated with the transfer. If a buyer fails to withhold when required, the fund is a backstop (i.e. the fund itself assumes secondary liability for the under-withheld amount, including associated interest and penalties) and may have to withhold on future distributions to the buyer to collect the amount which should have been withheld.

In practice, assuming that the fund does not generate effectively connected income, sellers or GPs may be likely to provide appropriate exemption certificates as part of the transfer to eliminate the buyer's 1446(f) withholding obligation. Buyers must also deliver a certificate to the partnership stating whether and how it satisfied any Section 1446(f) withholding obligation and attaching the certifications it relied on to claim an exception or compute the amount withheld.

FIRPTA

FIRPTA requires buyers of a non‑U.S. person's interest in a fund which is treated as a partnership for U.S. tax purposes to withhold 15% of the amount realized if the fund is a U.S. real property interest (“USRPI”). The fund will be a USRPI if 50% or more of the value of the gross assets consists of USRPIs and 90% or more of the value of the gross assets consists of USRPIs plus any cash or cash equivalents (commonly referred to as the “50/90 test”).

GPs can provide a certificate under Temp. Regs. Sec. 1.1445-11T(d) confirming that the interest is not a USRPI.  It is not uncommon, however, for GPs to decline requests to provide a certificate signed under penalties of perjury.  This is partly driven by the fact that the FIRPTA withholding rules do not impose a secondary obligation on the fund to withhold from distributions to the buyer if the buyer has failed to withhold.  Instead, GPs may provide confirmation through due diligence responses, which buyers and sellers will typically rely on to confirm that FIRPTA withholding is not needed. In contrast, where a fund or AIV holds significant U.S. real property or the portfolio company is involved in a business that may involve U.S. real property interests, GPs may not be able to confirm that the interest satisfies the 50/90 test. In the event of such uncertainty, at the cost of a buyer and/or seller, GPs may be willing to perform further FIRPTA analysis.  In the absence of further more definitive analysis, buyers may determine they are required to withhold under FIRPTA. 

UK

Stamp duty

The transfer of a partnership interest which holds shares and is executed in the UK technically falls within the scope of UK stamp duty (even if it does not hold UK shares and is not a UK partnership).  However, UK stamp duty is a voluntary tax, so it is generally only paid if a stamped document is required to update company records or a party wishes to rely on the transfer document in UK court proceedings. Since a stamped document is not required to update the partnership register, stamp duty is rarely paid on LP secondary transfers.

If the transfer documents relating to a non-UK partnership are executed outside of the UK and the parties are non-UK, the transfer should be outside the scope of UK stamp duty.  Historically, it was standard market practice for the PSA to require the parties to execute and retain the original PSA and all transfer documents offshore.  However, the increased volume of transactions together with the costs and practical complexities of offshore execution have led many parties to accept that offshore execution is overly burdensome. 

As part of the Office for Tax Simplification's project on the modernisation of UK stamp duty, the government proposed in a 2023 consultation that the transfer of partnership interests should be outside the scope of stamp duty, either through the way the scope of the new tax is legislated for or by relief or exemption.   This reflects the reality that very few transfers of partnership interests are currently submitted for stamping (the report says that fewer than 50 instruments transferring partnership interests are submitted for stamping each year).   It is expected that the new Securities Transfer Charge (which would replace stamp duty) will be brought into effect in 2027.

Whilst the intention to exempt the transfer of the partnership interests from stamp duty is welcome, it remains to be seen whether  the government will not impose a requirement for buyers to claim an exemption or relief via self-assessment which would create an additional administrative burden on buyers. 

The government also intends to introduce anti-avoidance legislation to prevent partnerships being used to avoid stamp duty on share transfers i.e. when a partnership is artificially inserted above a company with the main purpose of transferring shares in that company without stamp duty applying. Provided that the anti-avoidance rules are sufficiently targeted, we would not expect it to apply to a secondary transfer of partnership interests.

NRCGT

The UK imposes NRCGT on a non-resident seller on direct disposals of UK land or disposals of a substantial indirect interest (which includes any interest in a fund) holding shares or interests in a company deriving at least 75% of the market value of its gross assets from UK land.  UK NRCGT would rarely apply on private equity LP secondaries which have invested in trading companies because there is an exemption from UK NRCGT on indirect disposals if the entity uses the land as part of a trade, but could be relevant where the fund's investment strategy includes investment in UK land. 

If UK NRCGT does apply on the transfer of the partnership interest, (i) non-resident companies must register for corporation tax within three months of the disposal  and (ii) non-resident individuals or trustees must notify HMRC and pay any tax due within 60 days of the disposal.

France

Registration duties

In general, the transfer between two non-French residents of interests in a non-French entity should fall outside the scope of French registration duties.

However, ad valorem registration duties at a 5% rate may apply to the transfer of interests in a legal entity (irrespective of its place of establishment) which qualifies as real estate rich for French tax purposes.

An entity is regarded as real estate rich if more than 50% of the fair market value of its gross assets consists, directly or indirectly, of qualifying French real estate assets. Qualifying assets include French immovable property, real property rights and interests in entities that themselves qualify as real estate rich.

In addition, French registration duties may technically apply to the transfer of certain non-French entities treated as equivalent to French corporate entities where the transfer executed in France.

NRCGT

As a general rule, capital gains realised by non-French residents on the disposal of shares in a French resident company should not be taxable in France.

However, capital gains derived from the transfer of shares in entities (irrespective of their legal form and place of establishment and including indirect holdings through partnership structures) that qualify as real estate rich for French tax purposes may be subject to NRCGT at the standard corporate income tax rate in France (currently 25%, excluding any applicable surcharges).

Additionally, capital gains realised by a non-resident from the transfer of substantial interests in a French resident company (including indirect holdings through partnership structures) may also be subject to NRCGT at the rate above. A substantial shareholding is defined as a participation representing more than 25% of the rights in the profits of the French company at any time in the five years preceding the transfer.

French NRCGT is self-assessed by the seller and requires certain specific tax filings, which may involve the appointment of a fiscal representative based in France.

Germany

Real Estate Transfer Tax

In the context of share transfers, German Real Estate Transfer Tax (RETT, Grunderwerbsteuer) may become applicable in specific circumstances. RETT is triggered when at least 90% of the shares in a company holding German real estate (even if real estate is not the company's primary business purpose) are either transferred—directly or indirectly—to new partners or shareholders within a ten-year period, or consolidated under the ownership of a single partner or shareholder.

The law aims to ensure that transactions involving significant control over real estate assets are taxed similarly to direct property transfers. RETT rates vary by federal state in Germany, typically ranging between 3.5% and 6.5%based on the rateable value of the property.  To avoid unintended tax consequences, it is essential to seek professional advice if German real estate is part of the assets transferred directly or indirectly, noting that RETT is less likely to be applicable on an LP secondary transfer in light of the 90% threshold. 

NRCGT

Germany generally imposes NRCGT on non-resident sellers who have held at least 1% of the shares in a corporation at any point during the last five years. This applies to both direct transactions and cases where the shares are held indirectly, such as through a partnership structure.

While such non-resident sellers may still have to file a tax return or other notification to the German tax authority on exit, sellers on LP secondaries should be able to claim an exemption such that no tax is payable. Capital gains from the disposal of shares in German corporations are generally exempt from income tax, unless the shares being disposed of are held within a German permanent establishment. 

The filing obligation leads some investors to consider holding their interest in German investments via a “filing blocker”, i.e. entity which is treated as opaque for German tax purposes so that the requirement to file a tax return would fall on this entity rather than the underlying investors who are typically averse to making their own additional tax filings.  However, the benefit of using a filing blocker would have to be weighed against the cost and practical concerns of managing a corporate vehicle for the duration of the investment.

There is no mandatory obligation on a buyer to withhold German tax on the acquisition of shares or other assets. However, German tax law allows the tax authorities to issue a request requiring the buyer to withhold which is commonly applied in cases involving the direct disposal of real estate located in Germany but would not be expected to be applied in LP secondary transfers.

Italy

Documentary taxes

Italian documentary taxes do not apply to disposals of foreign or Italian partnership interests—regardless of underlying asset location—provided the transfer documents are drawn up and executed through correspondence or outside Italy. Documents must not be voluntarily registered in Italy, voluntarily filed with Italian public authorities, or referenced in other Italian-registered documents.

NRCGT

Italian NRCGT applies to: (a) direct disposals of Italian assets, including Italian partnerships and Italian resident companies (with certain exemptions for non-qualified shareholdings); and (b) indirect disposals of interests in non-Italian entities deriving more than 50% of their value from Italian real estate held for investment purposes ("property-rich entities").  We note that regulated UCITS or white-list resident AIFs managed by regulated AIFMs fall outside the property-rich entity regime.

Italian NRCGT liabilities may be mitigated under double tax treaties.  . Notable exceptions to this are (i) the Italy-France treaty, which allows Italy to impose NRCGT on French residents on the disposal of Italian companies in which the French resident is entitled to at least 25% of the company's profits and (ii) the Italy-US treaty, which allows Italy to impose NRCGT on US residents on the disposal of property-rich entities.

Where NRCGT applies, there is no withholding requirement—the seller must self-assess and pay the Italian tax authorities directly.

Spain

Transfer taxes

Transfers of securities are, as a general rule, exempt from Spanish VAT and transfer tax . However, an anti-avoidance rule may apply to tax certain secondary transfers of unlisted securities as if the underlying Spanish real estate had been transferred, where the transaction is intended to avoid the indirect taxes that would have applied on a direct real estate deal.

A rebuttable presumption of tax avoidance applies in particular where the purchaser acquires (directly or indirectly) “control” (defined as exceeding 50% of the share capital, taking into account group holdings) of an entity whose assets are at least 50% Spanish real estate not used in a business, or increases its stake once control has been obtained.

NRCGT

Spain generally taxes non-residents (without a Spanish permanent establishment) on Spanish-source capital gains. In LP secondary transfers, gains may be taxable where (i) the fund is treated as tax transparent for Spanish purposes, or (ii) the underlying investment is a Spanish real estate entity.

There is an exemption for EU/EEA residents for capital gains on "movable capital," subject to effective exchange-of-information requirements. However, this exemption does not apply where: (a) more than 50% of the entity's assets are direct / indirect interests in Spanish real estate, (b) an individual seller held at least 25% in the preceding 12 months, or (c) the sale is by a non-resident entity and would not have met the conditions of the Spanish domestic participation exemption.

Capital gains from shareholdings in Spanish venture capital companies or venture capital funds are exempt, provided the interest is not held through a non-cooperative jurisdiction.

Where no local exemption applies, gains are taxable at 19%, subject to double treaty relief. Most Spanish tax treaties exempt gains on share sales unless the company's assets are primarily Spanish real estate or the shareholding is "substantial" as defined in the relevant treaty.

In conclusion

Striking a balance

Navigating NRCGT and transfer tax risk on secondary transactions requires early identification of potential exposures, but this must be balanced carefully against the commercial realities and pace of the deal.  Tax due diligence can create delays and add disproportionate cost, while insufficient scrutiny can leave parties without protection against material tax risks.  Our global Secondaries and Liquidity Solutions practice brings together lawyers from our dedicated secondaries, funds and tax teams across the UK, the U.S., Europe, Singapore and Greater China. Drawing on extensive experience advising across the full range of secondaries transactions, our tax team delivers targeted, commercially focused advice that aligns with transaction dynamics.  Our integrated global tax network combines technical strength with coordinated cross-border support, ensuring that tax risks are properly assessed, efficiently managed and appropriately allocated in the PSA.

Authored by Elliot Weston, Caitlin Piper, Natalie Psaila, Natasha Newey with contributions from Ludovic Geneston, Mathias Schoenhaus, Serena Pietrosanti, Alejandro Moscoso del Prado, Igor Montejo, Maria Cristina Conte, Adrian Gaina, Marius Plum and Mariateresa Soave Carparelli.