European Private Equity-Fund for Entrepreneurs and the Impact on Market Growth within the Boundaries of the European Union.

Abstract

Each market and thus every economy thrives on growth. It is certainly indisputable that founders of new businesses in the sense of an entrepreneur can contribute to this growth through their activities. They are creating jobs, pay taxes and may help suppliers to gain new contracts. Unfortunately, it is not always made easy for entrepreneurs. The thesis „European Private Equity-Funds for Entrepreneurs and the Impact on Market Growth within the Boundaries of the European Union“ is concerned with the unpleasant situation for entrepreneurs, that they often are unable to finance their idea, their start, because access to funds or financing through banks is often difficult or unavailable due to lack of securities. It follows an approach to facilitate access to funds for entrepreneurs. Unfortunately, banks are currently not passing the low interest rates on to entrepreneurs. In these cases, Private Equity funds can help. However, confusing and especially inconsistent tax regulations provide for the partial caution on the Private Equity market. For example, up until today there are different sales tax treatments of the management fees and hardly any uniform tax rates. The aspired tax harmonization so far is insufficient. Therefore, this work determines fiscal parameters optimized for tax purposes in such a way that it will become more clearly, for Private Equity companies to launch such a fund. This in turn, will indirectly grant entrepreneurs a better access to funds. This is based on the assumption that a tax-optimized fund, therewith meaning a uniform taxation, will create incentives for investors and investment companies to launch new funds, which in turn will be able to supply founders with money. In Chapter 1, therefore, the question is asked: Which countries of the European Union are, in regards to Venture Capital investments, measurably successful and share among each other such similarities that their conditions for optimized tax conditions may be taken in to consideration? Chapter 2 deals with the Private Equity concept whereas in basics three actors are involved in such a transaction. They are the investors, the Private Equity firms and the target company. Whereas the Private Equity firms launch the Private Equity fund and collect the money from the investors. That these companies play a prominent role in this construct is recognized by the fact that they are also responsible for the distribution of the money to the target companies. Furthermore, the economic significance of Private Equity in the European Union is being covered in this chapter. Thus, Private Equity is quite significantly involved in the gross domestic product throughout the EU. However, these figures also illustrate that still too little is being invested in such constructs. This happens even though the positive effects such as job creation are undisputed. In order to correctly classify this and to be able to determine the gross domestic product as the most important figure of this work at a later point, the neo-classical and Keynesian growth theories have been examined, whereas Keynes has certainly experienced a renaissance in the EU.

The fundamental consideration and motivation for this work has been that entrepreneurs need to be helped. They have to have access to funding. However, the challenging legal framework and thus the tax classification partially obstruct the investment in new ideas. Chapter 3 deals with the legal framework of selected countries in the European Union. It discusses the AIFM Directive 2011/61/EU. Here, the countries of Austria, Luxembourg and Germany were considered in detail. This directive led to various discussions as to the tax legislation of the national states. However, it has been found that this directive hardly establishes obstacles in regards to fiscal issues. Only the consideration of whether the fund is a commercial or non-trading application can yet act detrimental. However, it could also be determined in that chapter that the taxation overall and thus also for Private Equity funds differs greatly throughout the countries of the EU. In Chapter 4, those countries of the EU are being determined, that are similar to each other in regards to their willingness to invest, applying a hierarchical cluster analysis with the parameters of Private Equity investments, Private Equity investments per capita, Venture Capital investments, Venture Capital investments per capita, the gross domestic product (GDP) and the GDP per capita. Thereafter, these parameters were supplemented by their corporate taxes to filter out groups still showing similarities to each other. The result of this selection by identifying similarities in their investment behavior while taking parameters such as corporate tax, the Purchasing Power Standard (PPS) and the Gross Domestic Product per capita into account, is that even countries exposed themselves, which certainly have not necessarily been outstandingly recognized prior to this study (see figure 2). Quite the opposite is the case. Economic giants like France and Germany are significantly vacating the top ranking positions.

The selected countries – excluding Norway and Switzerland, which are not Member States of the European Union – in turn have been examined as to their tax parameters of capital gains taxes, withholding taxes and company taxes and their willingness to invest in Venture Capital. These were then summarized and each converted into a unitary tax rate. The calculation showed that with average tax rates of 14.29% capital gains tax, 14.60% withholding tax and a company tax of 22.89% an average per capita GDP of 53.720 euros and a PPS of 154.6 (the reference value is 100) can be expected. These tax rates are attended by an average willingness to invest in Venture Capital – the instrument so important to entrepreneurs – of the qualified countries of approximately 0.09% of the overall Gross Domestic Product. Thus, if all future foundation activities were based on the tax-efficient and fiscally unified “FONDS EUROPAEA”, the markets of the national states of the European Union would in long term settle at a uniform per capita Gross Domestic Product - and thus for most resident of the Member States a significantly higher per capita GDP. The FONDS EUROPAEA initially serves the holding companies by offering them tax-optimized and simplified conditions. However, in the end it is eventually beneficial especially to entrepreneurs, whose financing problems would disappear based on the increased activities of the holding companies.