The Commission has published a report, prepared by an independent group of EU tax experts, which outlines the double taxation problems that arise when venture capital is invested cross-border, together with possible solutions.

According to the report, there are two main problems. The first is that the local presence of a venture capital fund manager in the member state into which an investment is made may be treated as a taxable presence (“permanent establishment”) of the fund or of the investors in that state. This could lead to double taxation if the return on the investment is also taxed in the country or countries where the fund or investors are located. The second main problem identified by the group is that venture capital funds may currently be treated in very different ways for tax purposes by the different member states. A fund may, for example, be treated as transparent in one state and non-transparent in another. Again, this can lead to cases of double taxation.

With regard to the first problem the experts propose that a venture capital fund manager should not be considered as creating a taxable presence for the fund or investors in the Member State where the investment is made. This would reduce double tax problems for cross border venture capital investment. With regard to the second problem, the experts recommend that EU member states should agree on a mutual recognition of the tax classification of venture capital funds.

The report will be presented by the Commission to member states’ tax authorities for input into the ongoing work of looking at how to improve the Internal Market for SMEs. The Commission will also take this issue into consideration in its broader efforts to tackle double taxation (see story “Public Consultation on Double Taxation Problems in the EU”).

The full text of the report can be accessed at http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/initiatives_small_business/venture_capital/tax_obstacles_venture_capital_en.pdf