Esba Position on Cross- Border Venture Capital Investment

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Position Paper

ESBA Position on Cross- Border Venture Capital Investment

Enschede 9th October 2012

Index

1. Introduction3

2. European Small Business Alliance4

3. Position4
a. Double Taxation4
b. Tax Treatment Uncertainties 5
c. Administrative Obstacles 5
d. Supporting Evidence and Facts6

4. Conclusion7

5. References 9

1. Introduction
Small and medium-sized enterprises (SMEs) are the backbone of the European economy, and represent more than 99% of all companies in the EU-27, but because of the economic crisis, SMEs role as the engine of economic growth seems to be threatened (EP, 2011,p.12). A dynamic venture capital (VC) industry, which helps and backs up SMEs’ startups, especially innovative ones, can lead to economic growth, new job creation and fostering of design and use of new know-how and technology.” Venture capital means investment in unquoted companies by investment funds (venture capital funds) that, acting as principals, manage individual, institutional or in-house money and includes early-stage and expansion financing, but not replacement finance and buy-outs. Strictly defined, venture capital is a subset of private equity” (EC, 2012, p.2). The expert group on removing tax obstacles to cross-border Venture Capital investment states that “the EU VC market still works below its potential” (EC, 2010, p.1), mainly in the area of cross-border Venture Capital investments. Reasons for this lack are the language barrier between countries and the difference in legal and regulatory requisites, which in our case means a missing cohesion between the tax-system of the member-states. This missing cohesion can lead to following problems: Double taxation, tax treatment uncertainties and administrative obstacles for cross-border VC investment. As a result, VC seems to be limited to domestic national markets and make it hard to invest in SMEs which want to access cross- border markets (EC, 2010). These 3 main issues have to be acknowledged by the EU in order to enhance cross-border Venture Capital investments. Please notice that all these problems only arise in cross-border VC investments. To solve these issues the European Small Business Alliance (ESBA) recommends reducing existing obstacles that hinder cross-border VC investment to a minimum, ensuring more clarity on the administrative level resulting in more cross border VC investment. Furthermore, fund managers need more transparency to investigate their new cross-border investment possibilities without having to deal with different kind of taxation and make it easier and more attractive for the investors to cross these borders. In addition, existing language barriers should be weakened. Another important point would be to create more awareness for existing funding programs in order to help entrepreneurs’ start-up businesses. This will also help to make the new SME’s more aware of existing differences in taxation between different countries. It is essential to be aware that Venture Capital is important but not vital to the problem of funding SME’s in Europe. This applies only to new innovative businesses that are on the forefront of their industries, leaving the main percentage of start-up businesses unable to get funding from Venture Capital investment (ESBA, 2012). It is shown in the commission’s analytical report on ‘SME’s Access to Finance’ from 2011, that there are only a mere 7 % of SMEs able to use this kind of funding.

2. European Small Business Alliance

The European Small Business Association was founded in 1998 and was established by 8 national small business associations. While performing targeted EU advocacy and profiling activities, the ESBA represents over almost one...
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