Making it easier for venture capital firms to invest in German companies is a good idea – excluding foreign VC firms is not

The European Commission has opened a formal investigation under EC Treaty state aid rules into planned German tax advantages (known in Germany as "MoRaKG") for venture capital companies and individuals investing in target enterprises.

The proposed German capital investment law would aim to facilitate the provision of risk capital to young, medium-sized companies by providing tax advantages to VC firms and to individuals investing in target enterprises.

But while EU Competition Commissioner Neelie Kroes agrees that “[r]isk capital is essential for young companies to flourish,” the Commission is concerned that the law would disadvantage foreign investment companies. 

To benefit from tax advantages, venture capital companies would have to have their legal domicile [Sitz] and corporate management in Germany.  According to Commissioner Kroes, this provision may breach Article 43 of the EC Treaty on the freedom of establishment – which is one of the reasons the Commission has started an investigation into the matter.

We here at ACT are usually for measures that help SMEs gain access to risk capital.  But in this case, I’m with Commissioner Kroes.  During challenging economic times like these, it is harder than ever for SMEs to get venture capital. VC firms that want to invest in young German companies should therefore be welcomed with open arms – no matter where they are located. 

Making Germany a less attractive investment destination by excluding foreign firms from tax benefits is simply not the right thing to do in the current climate of sharply reduced domestic credit availability.