Private Equity and Venture Capital in Europe_6

6.5 Fiscal framework for equity investors and vehicles: The EU condition 99 public funds to develop the economic system by supporting SMEs. Today, rigid regulatory limitations minimize the role of SBICs. Business Angels are private entrepreneurs who provide capital for a busi-ness start up. The tax profile of venture capital funds organized as 10-year LPs can deduct capital gains, whereas other revenues and costs are tax sensitive. According to the law, all SBIC revenues are de-taxed. The tax profile of Business Angels is more complicated and can be summarized by the following: Capital gains are de-taxed in case of reinvestment of money in 60 days in qualified small business stocks (QSBS) or SBIC shares Capital gains are de-taxed for 50% if the holding period of QSBS is higher than 5 years Taxes are paid differently if investors are considered a private rather than a legal entity. For private investors, capital gains and earnings are taxed at 5% or 15% depending on global revenues and state, whereas the capital gains of legal entities are always taxed (in the United States the participation exemption prin-ciple is not applied), and earnings are taxed from 0 to 30% depending on the held quota. Unlike Italy, in the United States there are low incentives for companies, especially for start-up and R&D expenditures. Start ups are provided with a mark down of the company tax rate between 15 and 35% related to the amount of revenues. For R&D costs and investments, exiting rules order a tax credit equal to 20% of the difference between yearly R&D costs and the average R&D costs of the last 3 years. No DIT or thin cap schemes are operating in the United States. 6.5.4 Vehicle taxation: the UK The principles for taxation in the UK are similar to those in the United States, but the actual tax systems are different; for example, the British scheme for pri-vate equity and venture capital deals is more complicated. In the UK, private equity and venture capital deals are run by Venture capital funds Venture capital trusts Business Angels Venture capital funds are pooled investments in companies believed to be too risky by banks or other financial institutions. In the UK the most common vehicle used to create a venture capital fund is the LP. To obtain benefi ts pro-vided by law, the LP must run for 10 years. 100 CHAPTER 6 Taxation framework for private equity and fiscal impact A venture capital trust (VCT) is a highly tax efficient closed-end collective investment scheme designed to provide capital finance for small expanding companies and capital gains for investors. First introduced by the Conservative government in the Finance Act in 1995, VCTs have proved to be much less risky than originally anticipated. The Finance Act created VCTs to encourage invest-ment in new UK businesses. VCTs are companies listed on the London Stock Exchange that invest in other companies who are not listed. Business angels in the UK, must act as individuals, so they can only be investors. In both the UK and United States venture capital funds organized as 10-year LPs can deduct capital gains, while other revenues and costs are tax sensitive. For VCTs capital gains are de-taxed if the holding period is longer than 3 years, whereas earnings are always de taxed. There are different tax structures for investors considered as Business Angels, legal entities, or private or corporate investors. Business Angels in the UK can only be private investors, and their investment generates a tax credit of 20% if the holding period is longer than 3 years and the amount of the investment is lower than £150,000. Capital gains are de-taxed (and losses are deductible) if the holding period is longer than 3 years. If the investor is a corporate venture there are general restrictions: they are allowed only to be unlisted companies or quoted for a maximum of 30% of their total shares . Corporate ventures generate a tax credit of 20% and capital gains are de-taxed if money is invested in the same investments within 3 years. For private individuals the system is less intricate, because capital gains and earnings are taxed at a level of 10% or 32.5% depending on the amount of rev-enue (under or over £29,400). Legal entities are unsuitable vehicles for private equity and venture capital deals, because costs can be higher than other vehi-cles: capital gains are always taxed (in the UK the participation exemption prin-ciple is not applied) and earnings are always taxed. Like the United States and contrary to Italy, there are many incentive schemes for start ups and R&D expenditures in the UK. Fiscal rules allow a mark down of the company tax rate within a range of 0 to 19% of the amount of revenues for a start up, and for R &D costs and investments there is a tax credit of 50% for unlisted companies. In the UK there is a strict thin cap scheme and interest rate costs are not deductible. 6.5.5 Vehicle taxation: reform in the German market After long political debate, the German legislature produced a new set of laws reforming the private equity and venture capital financial framework. 6.5 Fiscal framework for equity investors and vehicles: The EU condition 101 This reform is under review by the EU Commission regarding its fiscal aspects and by German financial institutions as far as the implementation feasibility is concerned. Two of the most important items created by the reform are Classification of a company as a venture capital company or equity invest-ment company Tax profile for incomes related to equity investments The new tax framework will change the actual subjects and vehicles oper-ating in the private equity and venture capital industry apart from their fiscal profi les. Vehicles that will be available in Germany include: Venture capital companies Equity investment companies Venture capital companies are recognized by BaFin 5 only if they meet these requirements: They must manage acquisition, holding, administration, and divestiture of venture capital participations Their headquarters must be in Germany; Minimum capital must be at least €1 million Management must be made up of at least of two managers Investments must be in “target companies,” i.e., in companies with particu-lar characteristics Equity investment companies are classified by the competent Supreme Federal State Authority and not by BaFin. 6 In Germany, equity investment is a very broad term that includes participations in domestic and foreign companies, all mezzanine financing, and all investment that may be related to equity. The German law distinguishes between an open equity investment company and an integrated equity investment company. The integrated equity investment company still qualifies as a subsidiary after the expiration of a 5-year start-up period during which investors can hold a participation of more than 40% of the capital or voting rights. However, the company may only invest in companies managed by at least one person who directly holds at least 10% of its voting rights. All equity investment companies may hold participations for a period of 15 years. 5 The German financial authority. 6 This aspect is one of the most criticized fiscal reforms. 102 CHAPTER 6 Taxation framework for private equity and fiscal impact The taxation profile of venture capital companies depends on its classification: asset manager or commercial company. If it is classified as an asset manager, the company is completely “transparent” for income tax purposes so all income is not taxed. If the classification of asset manager does not apply, all tax advantages are lost and corporation tax must be paid. However, capital gains, under certain conditions, may result in tax exemption. For equity investment companies there is no special treatment and general taxation rules are applied. Since 2009, for all operators, tax exempt carried interest is reduced from 50 to 40%. PART The Process and the Management to Invest ... - tailieumienphi.vn