EC scrutinises cross-border VC investment

A new report from the European Commission outlines the double taxation problems that arise when venture capital is invested cross-border, as well as possible solutions.

Comprising a group of independent tax experts set up by the commission in 2007, the report identifies two main problems together with possible solutions.

First, the local presence of a venture capital fund manager in the member state into which an investment is made may be treated as a taxable presence – i.e. a permanent establishment – of the fund or of the investors in that state.

This could lead to double taxation if the return on the investment is also taxed in the country or countries where the fund or investors are located. The experts propose that a venture capital fund manager should not be considered as creating a taxable presence for the fund or investors in the member state where the investment is made.

This would reduce double tax problems for cross border venture capital investment.

Second, it was found that venture capital funds may be treated in different ways for tax purposes by the different member states. A fund may, for example, be treated as transparent in one state and non-transparent in another.

Again, this can lead to cases of double taxation. The experts therefore suggest that member states should agree on a mutual recognition of the tax classification of venture capital funds.

The EC report will be presented by the commission to member states’ tax authorities for input into the work of looking at how to improve the internal market for small and medium-sized enterprises.

Issue: 4254 / Categories: News