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European Commission Removes Tax Obstacles to Cross-Border Venture Capital Investments
Venture capital is a vital source of growth for small and medium enterprises (SMEs). Active Venture Capital markets are important drivers for a competitive, entrepreneurial, innovative and dynamic European economy. Facilitating venture capital investment within the EU is crucial for good economic growth. Currently, the EU Venture Capital market still works below its potential. One of the main reasons is the lack of cohesion between tax systems across the EU that can lead to double taxation, tax treatment uncertainties and administrative obstacles. Consequently Venture Capital investments tend to be restricted to domestic markets rather than extending across European markets. Taxand Finland examines the recommendations behind the European Commission's move to improve cross-border venture capital investments. Taxand Luxembourg, Taxand Netherlands and Taxand UK also comment on these recommendations.
In May 2007 the European Commission established a Venture Capital Expert Group to review the tax obstacles to cross-border Venture Capital investment in Europe. The Expert Group published its report on 30 April 2010 identifying the main tax barriers to Venture Capital cross-border investments in the EU. The report also provides two main recommendations on how to overcome these barriers:
- the State into which a Venture Capital (VC) fund invests should never treat the activities of the VC fund manager as constituting a permanent establishment (PE) of the fund or its investors, and therefore causing a local taxable presence in the State of investment
- to prevent double taxation, all Member States should recognise the tax classification of a VC fund applied by the Member State in which the fund is established (as transparent or non-transparent, trading or non-trading and subject to tax or not subject to tax)
The report also contains other recommendations: VC funds should be allowed to claim withholding tax relief entitlements on behalf of their investors.
The Expert Group consisted of government and business tax experts from across the European Union. Mr Jyrki T?htinen, senior partner at Taxand Finland was a member of the group.
Commitment is required to improve the legislative and tax environment of venture capital players, such as the removal of certain tax obstacles by the European Commission to enhance cross-border venture capital investments. Cohesion between tax systems across the EU will help facilitate future venture capital investment within the EU and as a result improves economic growth.
"Compiling a list of vehicles with related qualifications will help to solve double taxation issues for all EU Member States and potentially OECD Member States, as conflicts can arise when qualifying vehicles for tax purposes. A similar approach could be considered in a UCITS ("Undertakings for Collective Investment in Transferable Securities") context to solve potential tax issues created by the EU Management Company passport: the UCITS IV Directive introduces a full passport for a UCITS Management Companies, which allows a UCITS established in one EU Member State to be managed by a Management Company established in another Member State. In many jurisdictions, the activities of the fund management company could make the UCITS become tax resident in the country where the management company is located. This is why it would be desirable to have UCITS considered by all EU countries as tax resident where they are established in order to avoid any taxation of the fund in the country of the Management Company." Taxand Luxembourg
"The recommendations seem logical and necessary but may in practice be difficult to implement. The recommendations could also be applied more broadly, for example with Private Equity fund investments. The recommendation with regard to the treatment of a VC fund applied by the Member State in which the fund is established (as transparent or non-transparent, trading or non-trading and subject to tax or not subject to tax) should especially be seen from a wider perspective as the treatment of "hybrid" entities is also relevant in non-VC structures". Taxand Netherlands
"The UK does have a long standing exemption to prevent investment managers creating a permanent establishment of a non-resident fund which has been important in maintaining the UK's competitiveness in this industry. However, the safe-harbour conditions contained in the exemption are complex and they do not apply to all activities which may be carried out in respect managing Venture Capital funds. The Venture Capital industry would welcome a simplified and EU standard approach. This would allow the fund managers to act more effectively, increase the attractiveness of the investment class and avoid often costly arrangements designed to mitigate the permanent establishment risk." Taxand UK
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