After half a century of a globalised economy, we consider the open market itself a settled fact not only because it engages us in global issues but also because it leads us to a need for critical reflection on the mechanisms of economic frameworks and fiscal policies within the European framework. This is because, according to the American economist Kaushik Basu, ‘as with all behaviours shaped by evolution, when the environment changes, there is a risk that existing behaviours become dysfunctional’.
Now, should the Venture Capital industry want to share in the growth potential of open markets, it can never give up on such issues, otherwise there is a risk of dysfunction. Therefore, based on its particular situation of a fragmented market underlying the globalized reality at the European scale, the only conscious option is the urgency for immediate adaptation.
Both the publication of Regulation (EU) No. 345/2013, of 17-04-2013, establishing the rules for standardisation at the European level of the qualification of European venture capital funds (EuVECA), and Directive 2011/61/EU on Alternative Investment Fund Managers, whose deadline for transposition is approaching, already reveal a committed effort towards harmonisation, establishing a regulatory framework and market supervision. However, significant obstacles to cross-border capital raising remain, notably with regard to tax aspects.
As regards Directive 2011/61/EU, although highlighting the importance of Fund Managers in the markets and companies in which they invest in its explanatory memorandum, concerned, in this sense, to establish rules (i) on the management and/or marketing of both EU Funds by non-EU Fund Managers and non-EU Funds by EU Fund Managers, as well as (ii) on the remuneration policies to which they should be subject, the Directive in question did not interfere in tax issues. However, these cross-border venture capital investment operations bring with them the problem of double taxation in the form of the possibility that the local presence of Fund Managers, performing management functions or marketing activities in the member state in which the investment is made, may be considered as a taxable presence (permanent establishment) of the Fund or of the investors themselves in that member state.
Since a harmonised approach to tax issues within the EU is notoriously difficult to achieve, the only option is to promote convergence and develop common and comprehensive mechanisms. Disparities in regimes clearly generate direct negative impacts.
In short, associated with the complexity and inconsistency of uncertain tax regimes, such as ours, the risk of double taxation will represent a risk to be avoided that then determines the channelling of capital to other places where competitiveness and tax simplicity are taken as instruments for attracting foreign direct investment.
In turn, Regulation (EU) No. 345/2013, despite explicitly expressing these concerns, is similarly silent on the subject in terms of even attempting to harmonise member states as regards the tax classification of these funds.
By neither raising the discussion nor the adoption of specific legislative measures on the regulation of tax terms within this scope, good opportunities for the desired deepening of fiscal union in the EU are missed. It will be down to member states individually – and, in particular, Portugal – to become aware of the urgency to overcome both the lack of competitiveness and fragility of national economies and the instability and complexity of the fiscal policy framework, key barriers with which the development of venture capital activity collides head-on.
in FundsPeople
27th June 2013