German Lower House Okays VC Rules

(Reuters) – Investments by venture capital firms in new and innovative companies will be treated more favourably by the German tax authorities, according to a law passed in the Bundestag lower house of parliament on Friday. Following are the main points of the law, which is due to be signed off in the upper house, or Bundesrat, next month.

KEY FIGURES

– Venture capital firms must invest mainly in new and innovative companies to qualify for relief from a local business tax (Gewerbesteuer).

– The target company must be no older than 10 years and with net equity of no more than 20 million euros ($31.5 million).

– The activities of venture capital firms will be overseen by financial services regulator BaFin.

– Any investment must not exceed 90 percent of a target company's net equity.

– Of its overall administered capital, an investor may only put up to 40 percent into a single start-up company.

CARRIED FORWARD LOSSES

– The extent of a start-up company's entitlement to offset taxes against debts carried forward remains equal to the amount of unrealised gains it had at the time of acquisition.

– The entitlement to offset taxes against losses carried forward also remains in place if the investor sells its share to a third party in the future. However, the venture capitalist is required to have kept its share in the target company for at least four years prior to that.

TAXING

– The venture capitalist's activities are being considered as those of an administrator for tax purposes: The charges therefore only apply to the investors.

– The tax free quota on carried interest (the share of any profits the partners of venture capitalists receive as compensation) is being reduced to 40 percent of the profit from 50 percent.

BUSINESS ANGELS

– So-called “Business Angels”, who take a stake in a target company and share their know-how, are exempt from tax on the first 200,000 euros of any profit they make from their investment.

– Such experts, who must be retired, have to take a stake of at least 3 percent in the start-up company. They may keep their share of a maximum 25 percent for up to 10 years. The minimum sum to be invested is 25,000 euros to qualify as a Business Angel.

(Reporting by Matthias Sobolewski)