Venture capital is a vital source of growth for small and medium enterprises (SMEs). Active Venture Capital markets are important drivers of more competitive, entrepreneurial, innovative and dynamic European economy. Therefore, 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 the tax systems across the EU that can lead to double taxation, tax treatment uncertainties and administrative obstacles. In consequence Venture Capital investments tend to be restricted to domestic markets rather than extending across European markets.

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 cross-border investments of Venture Capital in the EU and recommending how to overcome these barriers.

The report contains two main recommendations for action:

  • 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 such as that 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 Tähtinen, senior partner at Borenius & Kemppinen, was a member of the group.

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