The EU plans to boost cross-border venture capital investment by preventing double taxation for funds working in more than one European country.
In an expert report published on Friday (30 April), the European Commission said it was committed to removing obstacles to the flow of investment across borders, amid ongoing concerns that small firms are struggling to access capital.
The Commission is likely to incorporate the findings of the report, compiled by an independent group of EU tax experts, into the 'Research and Innovation Plan' to be published in the autumn.
The group proposes that venture capital fund managers should not be treated as a taxable entity 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," the group said.
Secondly, it was found 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.
The experts therefore suggest that EU member states should agree on a mutual recognition of the tax classification of venture capital funds.
Algirdas Šemeta, the EU's commissioner for taxation, customs, audit and anti-fraud, said venture capital is the lifeblood for many SMEs.
"As recognised in the EU's 2020 goals, improving the business environment for SMEs is crucial if we are to build a stronger, sustainable economy. Therefore, we must make an efficient European venture capital market a reality, and this means eliminating any tax obstacles that still stand in its way."
The report was welcomed by the venture capital industry, which urged policymakers to integrate its proposals into the implementation of the Europe 2020 strategy.
"These proposals would represent a major step forward in facilitating venture capital investment across Europe, as well as a sensible structure for cross-border private equity activity more generally," said Fabio Brunelli, chairman of European Venture Capital Association's tax and legal committee.