Venture capital investments between EU countries causing tax issues

A consultation into tax problems arising from venture capital investment made across different EU states has been launched by the European Commission (EC).

It follows a report made in 2010 which found that differences between the tax systems of the 27 EU member states were causing double taxation, legal and administrative uncertainty for cross border investments.

The EC said that such problems 'could hinder the full development of the venture capital market in Europe and therefore compromise the provision of financing to the EU's most innovative small and medium-sized enterprises (SMEs).'

Venture capital provides early-stage financing to innovative and high growth companies, particularly SMEs, who face difficulties in obtaining credit. Governments across the EU hope the scheme will generate economic growth and new jobs.

Investors in return receive a proportion of the company's shares and often generous tax reliefs on investments - UK investors receive a 30 per cent income tax relief on shares and may also be exempt from paying capital gains tax.

Calling SMEs the 'backbone of the EU's economy, the EC's Algirdas Šemeta said it was the 'collective responsibility of the Commission and Member States to find solutions to tax obstacles that hinder cross-border venture capital within the EU.'

EU member states already have an agreed structure in place to try and prevent double taxation that allocates taxing rights to certain countries. However, the EC said that the complexity of commercial structures used in venture capital means they cannot always be applied.

The consultation is calling for examples of tax problems affecting businesses in order to assess the impact of additional cost to investors and SMEs and develop solutions.

It is encouraging members of the public, businesses and tax professionals to air their views.

The consultation is open until 5 November, with the EC hoping to develop or implement new policy by 2013.