The European Commission has opened a formal investigation into planned German tax advantages for venture capital companies and individuals investing in target enterprises.
Officials in Brussels said the law, known as Gesetz zur Modernisierung der Rahmenbedingungen für Kapitalbeteiligungen (MoRaKG), would also breach the EC treaty on the freedom of establishment. For venture capital firms to benefit from the tax advantages, they would have to have their legal domicile and corporate headquarters in Germany, which would exclude certain foreign investment companies.
MoRaKG is the result of lengthy discussions concerning the treatment of private equity in Germany. The government coalition of Social Democrats and Christian Democrats had been composing a comprehensive private equity law that would govern all private equity investment to attract private equity capital to Germany. There were no tax breaks for private equity firms before then and the treatment of capital gains was unfavourable.
"The law is not sufficient for our industry but the government passed it anyway," said Dörte Höppner, the managing director of the German Private Equity and Venture Capital Association. "We are still pushing for a comprehensive private equity law and hopefully after the elections in September we will get it," she added.
German politicians have been highly critical of capital investment funds in the past. In 2005, Franz Müntefering, chairman of the Social Democrat party, described private equity funds as 'locusts'. It is thought he was referring to large foreign investment funds, but MoRaKG is designed to aid German venture capital funds.
"The law disappointed fund managers as they had been waiting for a comprehensive law and all they got was this little piece of legislation," said Eugen Bogenschütz, a tax partner at Allen & Overy in Germany.
"When the law was announced, there was no proper meaning and its focus was extremely narrow," he added.
Some doubt whether the law will be used at all. "I doubt there will be any funds using it as they are better off getting an advanced ruling from the tax authorities. There are very limited uses for the Act," said Frank Thiäner, an M&A specialist at P&P Pöllath & Partners in Germany.
A guidance letter concerning capital investment funds was released in 2003 by the ministry of finance. "It doesn't have the force of law and it would be more helpful to have binding tax laws," said Thiäner. Despite the problems using a guidance letter, private equity firms still prefer it to MoRaKG.
"Even if the Commission decides the [MoRaKG] law is legal, I don't expect private equity firms to use it," said Thiäner.
