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Business

Eichel Targets IT-Sector Venture Capital Funds

Germany's Finance Minister has attracted the fury of the country's information-technology makers and investors with a draft proposal aimed at revising tax guidelines for venture-capital and private-equity funds.

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German Finance Minister Hans Eichel needs higher tax revenues

Germany's Finance Minister has attracted the fury of the country's information-technology makers and investors with a draft proposal aimed at revising tax guidelines for venture-capital and private-equity funds. The country's investment-company association said the proposal poses a serious danger to Germany's already weak status as a home base for new businesses.

"Germany stands to lose billions of euros in capital," said the association's managing director Holger Frommann. "For Germany as a start-up location, it means a further disadvantage in terms of international competitiveness," said Gerhard Rohleder, head of Germany's high-tech federation Bitkom.

Eichel's proposals are aimed at curbing the tax advantages currently enjoyed by VC and private-equity funds, which are paid into by private investors and firms interested in investing in start-ups and medium-sized businesses with growth potential.

The funds are a boon to both sides: start-ups have easier access to seed financing and investors are able to lower investment risk by distributing participation across several fledgling firms rather than focusing on one.

Eichel's proposals would tighten conditions on these funds, thereby qualifying them for a higher bracket of commercial-income tax. The new guidelines would also make the fund managers' profit percentage, the so-called carried interest, taxable as income at a percentage of up to 48.5%, compared with 20% in the U.S. and Britain.

Frommann estimated that around 100 funds in Germany would be affected. The revisions were planned to go into effect at the end of March, but preliminary approval is delaying the process. "We don't know when it will go into effect, we're still working on approval from the individual states," a spokesperson for Eichel said.

The Finance Ministry did not comment on the criticism to the plan from the IT sector.

Rohleder sees the new rules as a threat, since the return on investment for investors paying into the funds would be reduced by the higher tax bracket. The logical consequence would be reduced future investment. "Especially start-ups and other VC-financed companies would see a decay in their financing possibilities," he said.

Last year, around 1,000 companies in Germany were financed with the help of venture-capital funds.

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