BAND, which promotes the interests of business angels in Germany, said the investigation would lead to an unneccessary delay in the law’s full implementation, now urgently needed to support startup companies amid the financial crisis.
“This will paralyse demand among business angels for investing in high-tech companies,” said BAND chairman Roland Kirchhof in a statement. In a follow-on interview, Kirchhof added that BAND’s members would likely hold back investment due to the insecurity created by the announcement.
The European Commission announced that it was opening a formal investigation into the capital investment law, a clarification of existing risk capital rules that was approved by the German Parliament in July 2008.
The law allows individuals and venture capital firms that own between 3 per cent and 25 per cent in “target enterprises” tax exemptions of €200,000 on profits that result from selling these investments. Target enterprises are defined as privately held companies based in the European Union with capital of up to €20 million that are not older than ten years.
In a statement issued last week, the Commission said that the law may run foul of the EU’s state aid rules, because it appears to favour some companies over others. “Risk capital is essential for young companies to flourish. However such measures must be fair and not give certain companies disproportionate advantages over their competitors,” said Neelie Kroes, EU Competition Commissioner, in the statement.
The Commission is concerned, for example, that venture capital companies and private individuals can deduct the losses of target enterprises, whereas other investment companies may not. The Commission also said it is investigating whether the law adheres to EU guidelines on risk capital. And, finally, it believes that the amount of tax advantages awarded may in some cases be too generous.
But Kirchhof said the actual tax advantages involved are “peanuts” compared with the billion-euro amounts that governments are now distributing throughout the economy. He said that in practice, the actual tax advantages that individual business angels receive are far lower than the €200,000 mentioned in the law. For example, an investor owning the maximum allowable amount of 25 per cent in a young company would only receive a break on €50,000 of the income from selling that stake, which after taxes amounts to only €22, 500.
According to BAND, business angels are the most important players in the early-stage market in Germany, investing some €300 milllion a year in high-tech companies.
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