Venture Capital

Start-Ups Cheer Capital Gains U-Turn

Schäuble AFP Getty Images
Schäuble for Start-Ups.
  • Why it matters

    Why it matters

    The German government’s decision not to impose capital gains tax on the sale of small share stakes will help the country’s venture capital market and start-up scene which had been unsettled by the plan.

  • Facts

    Facts

    • The German government has abandoned a plan to tax capital gains on small stake sales.
    • Venture capital firms and start-up companies had warned that the measure would have hurt investment in new businesses.
    • Only 0.02 percent of gross domestic product is invested in venture capital in Germany. The U.S. percentage is 10 times higher. In Israel, it’s 20 times higher.
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    Audio

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Start-up firms and venture capital investors in Germany can breathe a sigh of relief: Finance Minister Wolfgang Schäuble has abandoned his plan to tax capital gains from the sale of small stakes in companies, Handelsblatt has learned.

Financial sources told the paper that earnings from the sale of  share stakes of less than 10 percent of a firm’s capital will remain exempt from tax.

It’s a U-turn after the finance ministry circulated a draft of the country’s new investment tax law that sent shock waves through the investment community. A number of states, including the western state of Hesse, home to Germany’s financial capital, Frankfurt, had backed the reform, saying profits from the sale of small stakes should be taxed in the same way as dividends are.

Venture capital investors such as business angels and funds usually sell their stakes in start-up companies that perform well, and then invest the proceeds in new start-ups. A tax on the capital gain would have made such investing less attractive, and could have stunted Germany’s burgeoning start-up scene.

It’s a U-turn after the finance ministry circulated a draft of the country’s new investment tax law that sent shock waves through the investment community.

“We have decided not to pursue the issue of capital gains taxation and to remove the relevant passages from the draft legislation,” said Deputy Finance Minister Jens Spahn.

He added that the debate had unsettled investors in the last weeks and the ministry had been unable to find a way to exempt venture capital from the reform without breaching E.U. rules.

When the plan became public, no less than 19 business associations condemned it as a “disastrous signal” that would damage Germany’s standing as location for investment and start-ups.

At present, only 0.02 percent of gross domestic product is invested in venture capital in Germany. The U.S. percentage is 10 times higher. In Israel, it’s 20 times higher.

“The debate in the last few weeks had noticeably unsettled investors in the start-up scene,” Mr. Spahn, the deputy finance minister, said at a conference of small and medium-sized firms in Dresden on Saturday.

The government will go ahead with other reforms aimed at simplifying investment tax laws and introducing a tax regime for mutual funds.

The plan had run into opposition from members of Chancellor Angela Merkel’s conservative Christian Democratic Union and its Bavarian sister party, the Christian Social Union. A working group on fiscal policy in the party had concluded the plan ran counter to the government’s aim of promoting venture capital.

It would also have damaged company pension funds that have a large proportion of their money invested in stocks. In effect, it would have amounted to a tax hike, which Ms. Merkel’s government has ruled out.

However, the center-left Social Democrats, the junior partners in Ms. Merkel’s coalition, never understood what the fuss was about. They argued that start-up investments tended to be high-risk deals that frequently resulted in losses, rather than profits.

The Federal Association of German Capital Investment Companies welcomed the U-turn.

“That’s the right decision to create a strong venture capital environment in this country,” said a management board member of the association, Ulrike Hinrichs. Maintaining the status quo would promote investment and would encourage foreign investors to put their money in German ventures, she said.

Florian Nöll, chairman of the Federal Association of German Start-Ups, was relieved.

“The draft law deeply unsettled the world of start-ups. Now we can look forward again,” he said.

However, he added that the government now needed to implement planned tax breaks and subsidies for venture capital investors it pledged in September.

 

Frank Drost is an editor at Handelsblatt in Berlin, covering financial supervision and banks. To contact the author: drost@handelsblatt.com

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