BIO Deutschland Criticises Tougher Regulations for Taxation on Investments

In the middle of May, BIO Deutschland asked the German Federal Minister of Finance, Peer Steinbrück, to make a statement on the planned measures to tighten Paragraph 8 of the Corporation Tax Law. Peter Heinrich, President of the Board of BIO Deutschland, said: "The Finance Minister is continuing along the road paved by the corporate tax reform and making conditions for the financing of innovations in German small and medium-sized enterprises worse." In his letter to Steinbrück, Heinrich explained that the increase of the tax burden on investors in these companies is in dramatic contrast to the promises of solidarity with SMEs previously expressed by the Federal Government.

Commenting on the planned limitation of the German affiliation privilege as a result of the tightening of Paragraph 8 of the Corporation Tax Law, BIO Deutschland board member and tax specialist Jan Schmidt-Brand explained that "The legislators would specifically reduce profits to institutional investors, should the latter choose an investment form that is typical of the venture capital financing of innovative SMEs." Schmidt-Brand added that the state would also reduce its tax revenue in the long run.

Using EU regulations as an argument is not acceptable, according to Dirk Honold, who co-chairs BIO Deutschland’s Working Group on Finance and Taxation with Schmidt-Brand. Honold said, "In the light of the favourable innovation conditions in other EU member states, it would be preferable to remove the disadvantages facing innovative foreign investors rather than making conditions for German investors worse." He added that this would lead investors to Germany, who would make innovations possible.

The Federal Ministry of Finance introduced the draft on the tighter measures at short notice as a supplement to the Draft Annual Tax Law of 2009. According to the draft, Paragraph 8 of the Corporation Tax Law is to be amended so that in corporations (for example, incorporated, joint stock and limited companies), dividends from free floats and profits from the divestiture of free float holdings in corporations will no longer be exempt from taxation but will instead be subject to corporation tax. The free float consists of all holdings of less than 10 per cent of the capital. This would fundamentally change corporate tax legislation as this type of dividend and profits from divestiture have been exempt from tax to date (five per cent of the dividends and profits from divestiture are regarded as non-deductible operating expenses). Corporations with free floats would thus be taxed significantly more highly or possibly even more than once in the future. Investors who keep their free float holdings in limited companies would be certain to change their investment strategy in the short or medium term as a result of further tougher measures affecting the conditions for investments in Germany.

The development of high tech products – including and particularly in advanced technologies such as biotechnology – is crucial for the future of our economy. This was recently confirmed by the Expert Commission for Research and Innovation in a report commissioned by the Federal Government. The financing of new, innovative companies with outside capital is generally not possible because of the high risk in product development. As a result, access to venture capital is essential to small, innovative companies.