Brussels, 1 st October 2009
State aid: Commission partly authorises German tax law on risk capital, subject to amendments
The European Commission has partly authorised, under EC Treaty state aid rules a German Law to Modernise the General Conditions for Capital Investments (MoRaKG). The Commission found that the positive impact of income tax benefits for private investors that provide risk capital to companies that need it would clearly outweigh potential distortions of competition brought about by the aid. The Commission therefore authorised the proposed tax benefits for private investors under certain conditions and requested Germany to bring them into line with the Commission's Risk Capital Guidelines (see ). However, the Commission found that proposed provisions concerning business tax breaks for Venture Capital Companies (VCC) and the right of Target Enterprises (TE) acquired by VCCs to carry forward losses, were incompatible with the Risk Capital Guidelines and with the principle of freedom of establishment (Article 43 of the EC-Treaty). In particular, these provisions would require beneficiaries to have their domicile in Germany and provide an unfair competitive advantage to certain companies over their competitors. The Commission therefore concluded that business tax benefits and loss carry forward provisions in favour of VCC and TE were incompatible with the Single Market and could not be implemented.
Competition Commissioner Neelie Kroes said: "I am pleased that Germany intends to give tax breaks to stimulate private investors to offer more risk capital. At the same time the Commission has to ensure that tax measures do not discriminate against companies based in other Member States".
Compatible tax benefits for private investors
Under the -German law MoRaKG, an income tax benefit would be granted under certain conditions to private persons investing in certain target enterprises (TE), if they realise capital gains on the sale of their participations.
The Commission's investigation found that the measure would stimulate the provision of risk capital by private investors without unduly distorting competition. In particular, tax benefits would be granted only as a complement where the return on investment would be insufficient. Moreover, the maximum advantage that would be granted to a private investor is approximately €22 500 that is relatively small in the venture capital market. The Commission therefore invited Germany to amend some conditions to bring the measure in line with the Risk Capital Guidelines and inform the Commission of these amendments within 2 months.
Incompatible tax benefits
In 2003, the German Minister of Finance issued a circular letter to tax authorities, giving guidance on whether venture capital funds and private equity funds were subject to business tax or not. In 2008, Germany introduced restrictive anti-abuse rules on loss carry forward in corporate taxation. These rules prohibit the carry over of losses if the ownership structure of a company changes substantially.
MoRaKG defines a new group of investment funds, the Venture Capital Companies (VCC). Following a detailed assessment the Commission concluded that some VCCs may not be liable for business tax under the MoRaKG, while they would be liable for business tax under the ministerial letter. Similarly, MoRaKG would allow only TEs acquired by VCCs to carry forward losses. Other target enterprises and risk capital investors that fell outside the scope of MoRaKG would not be able to do so.
Therefore the law would introduce a selective advantage for certain VCCs and certain TEs, which would constitute state aid. The Commission found that such aid would be incompatible with the Single Market, as it would give certain VCCs and TEs an unfair advantage over their competitors, who would have to operate without such aid, in derogation to the common German tax law. Moreover, to be able to benefit from the aid, VCCs would have to have their domicile and corporate management in Germany. This would infringe the right of companies to establish themselves anywhere they chose within the Single Market (freedom of establishment - Article 43 of the EC Treaty).
The non-confidential version of the decision will be made available under the case number C 2/2009 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News