The Draft Bill of a Law for the Modernization of the Basic Conditions for Private Equity Participation (MoRaKG)
The Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (BVK) (German Private Equity and Venture Capital Association e.V.) appreciates that the Bundesministerium der Finanzen (Federal Ministry of Finance) intends to modernize the basic conditions for private equity participation.
The draft bill takes up various considerations of the BVK, especially for the area of venture capital. In its opinion on the law for the modernization of the basic conditions for German equity investment companies which was published today, the BVK, however, regrets that it has not been possible to provide a single set of regulations for the area of equity capital which is not listed on the stock exchange, even though this is evidently offering itself and has been agreed upon in the coalition agreement as well. Large areas of private equity capital remain unaddressed in the draft bill. It is not understandable why better basic conditions are to apply to a part of the private equity funds and not to others. All private equity funds have in common that they provide the German economy with urgently required equity capital. All funds profit from competitive and healthy target firms. The draft shows that the Federal Government has become aware of this and that is why the Federal Ministry of Finance should seize the chance and improve the basic conditions for all private equity funds.
The tax-transparent treatment of private equity funds will only be laid down for the area of early stage financing. The tax-transparent status of all private equity funds is, however, a central prerequisite to direct urgently required equity capital to Germany. Without a legally anchored transparent tax system, many funds will be issued outside Germany also in the future – and consequentially there will be fewer investments in Germany. The creation of stable and reliable basic conditions cannot be dispensed with if international capital flows are to be used for restructuring the Deutschland AG (=network of domestic capital providers, banks, and industrial groups grown in Germany after World War II). As long as the investment of funds is restricted to participation in stock corporations, significant tax deficits are not to be anticipated.
The draft bill provides for regulations with which the target firms of the venture capital investment companies are allowed to carry over losses and use them. This is to be expressly welcomed. Also in case of a uniform private equity law for all funds, only these young target firms should be granted the possibility to carry over losses. Thus also here no additional shortfall in tax revenue is to be expected.
In terms of supervision, the draft bill creates much confusion and an unnecessary administrative effort: in the future, venture capital investment companies are not to be regulated at all by the BaFin (German Federal Financial Supervisory Authority), and this applies likewise to equity investments companies and funds for private equity capital which fall neither under the one nor the other category (this applies to the majority of funds) and are not to be regulated at all by the states’ departments of trade and industry. The BVK expressly supports that all areas in which funds for private equity capital are active, will be subject to supervision to an appropriate extent. Here a single supervision should be created for all private equity areas. Since the states’ departments of trade and industry have proven themselves in the supervision of equity investment companies and have the required knowledge about private equity, they should be entrusted with the supervision of all funds.
The BVK has just recently expressly spoken out in favor of an exemption of the management fee from turnover tax which is unique in Europe and would entail massive competitive disadvantages for German funds. The MoRaKG could be the suitable way to legally lay down exemption from turnover tax as in Luxembourg by defining private equity funds as special funds in the sense of the European Turnover Tax Guideline.