Following two and a half years of uncertainty, the German Finance Ministry appears to have responded to the venture capital market’s call for favourable tax treatment of private equity funds.
The proposals will result in funds being treated as asset management entities rather than trading businesses. While trading business are taxed locally at rates of around 40 per cent, asset management entities are treated as ‘tax transparent’ and do not generate additional taxation for investors.
“The Finance Ministry ruling marks an end to three years of uncertainty for individuals wishing to invest in private equity funds in Germany,” said Holger Fromann, BVK managing director. “The security it provides for individuals means it will once more be possible to raise new funds next year.”
Until February 2001, tax treatment was not a major problem for German private equity funds, which had to gain permission to set up limited partnerships from local authorities, which tended to be sympathetic. But then the financial authorities concluded that policy should be formed at a national level.
A first draft of finance ministry proposals in June 2001 were ‘terrible for the venture capital market’ according to Fromann and led to intense lobbying from the BVK. He feels that the lobbying has borne fruit in the latest proposals, but in the meantime the possibility of harsh tax treatment has hung over the industry like a cloud and dented investor confidence. He added that there were still two or three measures in the latest proposals that are unfavourable to venture capital and would be the subject of further discussion next year.
Fromann said the proposals would also have a beneficial impact on local buyout funds, but pointed out that many funds at the later-stage end of the market are pan-European or international in nature and domiciled in other jurisdictions.