EC To Harmonize Tax On Venture Capital

by Ulrika Lomas, Tax-News.com, Brussels

03 May 2010

The European Commission has today (April 30) published a report which outlines the double taxation problems that arise when venture capital is invested cross-border, as well as possible solutions.

The report sets out the findings and recommendations of an independent group of European Union (EU) tax experts, which was set up by the Commission to look at how to remove the main tax barriers to cross-border investment in venture capital. The Commission said that it will now consider how best to follow up on the findings in the report, in line with its broader agenda to eliminate double taxation in the EU.

Algirdas Šemeta, Commissioner for Taxation, Customs, Audit and Anti-Fraud, commented: “Venture capital is the lifeblood for many SMEs. And, as recognized in the EU's 2020 goals, improving the business environment for SMEs is crucial if we are to build a stronger, sustainable economy. Therefore, we must make an efficient European venture capital market a reality, and this means eliminating any tax obstacles that still stand in its way."

The report summarizes the main findings and conclusions of the Expert Group on Removing Tax Obstacles to Cross-border Venture Capital Investments. The group was set up by the Commission in 2007, as one of a series of measures aimed at facilitating cross-border venture capital investment in the EU, to the benefit of SMEs.

The Commission summarized two main problems identified in the report, and possible solutions, as follows:

Firstly, the local presence of a venture capital fund manager in the member state into which an investment is made may be treated as a taxable presence ("permanent establishment") of the fund or of the investors in that state. This could lead to double taxation if the return on the investment is also taxed in the country or countries where the fund or investors are located. The experts propose that a venture capital fund manager should not be considered as creating a taxable presence for the fund or investors in the member state where the investment is made. This would reduce double tax problems for cross border venture capital investment.

Secondly, it was found that venture capital funds may currently be treated in very different ways for tax purposes by the different member states. A fund may, for example, be treated as transparent in one State and non-transparent in another. Again, this can lead to cases of double taxation. The experts therefore suggest that EU member states should agree on a mutual recognition of the tax classification of venture capital funds.

The Commission informed that the report will be presented to member states’ tax authorities for input into the ongoing work of looking at how to improve the Internal Market for SMEs.

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