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Start-ups not at risk from German tax plans: government official

[BERLIN] Proposals to reform German capital gains tax that would impose a tax on gains from the sale of minority shareholdings will not hinder start-up companies, a senior government official said on Tuesday.

The draft proposals, circulated on July 22, have been criticised by Germany's start-up industry, which has said the tax could choke off financing for fledgling firms.

Senior politicians among Chancellor Angela Merkel's conservatives have also warned the new rules would scare off potential investors.

Speaking to journalists, the official dismissed suggestions that the draft law would discourage investment in young companies. The bill includes an exemption for so-called business angels who invest in start-ups, defined as companies younger than three years old, the official said.

German start-ups already struggle to raise funds when compared with their US peers due to a shortage of venture capital.

Investment in German start-ups more than doubled to US$1.7 billion last year, but this was still a pittance compared with the US$49.4 billion attracted by US-based start-ups.

"The government stresses at every opportunity that they don't want to worsen the financing conditions for start-ups," Florian Noell, head of the Startup Association, said in a statement. "With this draft law they are breaking their promise and taking away much-needed capital from founders."

The finance ministry wants the capital gains tax reform to close off a potential loophole that allows investors to sell their shareholdings in companies to avoid paying taxes on dividends in listed and unlisted firms.

The draft bill proposes to subject capital gains to full taxation if the investor holds less than 10 per cent of the share capital.

Its critics say the move will amount to a tax rise for business angels, the private investors who offer firms capital, know-how and networks, that are currently almost completely exempt from capital gains tax if they reinvest the proceeds.

A third of young companies surveyed by the German Startup Monitor said they received funds from business angels in 2014.

Under the proposals, a business angel would be able to make a capital gain of up to 30 per cent on the original value of their holding without paying tax, the government official said.

The draft bill is currently in the discussion phase. The government hopes to agree on it in the cabinet by the end of the year with a view to it being debated in parliament in the first half of 2016.