German VC Regime Criticized

by Ulrika Lomas, Tax-News.com, Brussels

01 April 2010

Just as an Organization for Economic Cooperation and Development (OECD) economic survey of Germany urged the government to 'strengthen the venture capital market,' two of its largest venture capital firms say its tax regime is not conducive for investing in early-stage business and want out.

The OECD report criticizes Germany's government support for innovation and availability of finance, suggesting that the venture capital market only provides "a negligible share of overall financing, but is particularly well suited to supporting the creation of innovative and entrepreneurial firms."

Other measures recommended by the OECD included the amendment of the Act on the Modernization of Framework Conditions for Venture Capital and Equity Investments (MoRaKG) to comply with European Union regulations and to reduce some of the restrictive provisions in the Act. Regarding direct public R&D support, the OECD wanted to see tax incentives to complement grants, but called for an end to the duplication of public subsidization.

OECD studies had indicated that tax incentives were more effective in stimulating private R&D and had the advantage that winning projects were picked by the market rather than the government, thus avoiding distortions in the allocation of resources between different fields of research. When considering tax incentives, "attention had to be given to the issue of policy design in order to minimize the deadweight loss."

In the Wealth Bulletin, Doerte Hoeppner, head of BVK, the German association of private equity and venture capital companies, criticized the uncertainty in German law that "threatened the guarantee of tax transparency for venture capital funds." She said it made foreign investors reluctant to invest in funds based in Germany, and a 2008 amendment made funds liable for value added tax on their fees.

According to Wealth Bulletin, Bernd Seibel, chief financial officer at TVM Capital and Hendrik Brandis, managing partner at Earlybird, two of the five biggest venture capital firms in the country, are minded to relocate their future fundraisings outside Germany because of the tax regime; Luxembourg, Guernsey and the UK being the main options. However they would continue to maintain offices and invest in Germany.

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