Advisory, Europe, Macroeconomics and macroeconomic policy

Effectiveness of tax incentives for venture capital and business angels to foster the investment of SMEs and start-ups

Project description

Improving access to financing, in particular for start-ups, SMEs, and young companies with innovative growth plans, is one of the central objectives of the EU’s Capital Markets Union (CMU) Action Plan, launched in September 2015. Historically, European SMEs have been primarily dependent on bank finance. This source of funding is however restricted by the banks’ refinancing capacity, risk appetite and capital adequacy – restrictions that have been particularly acute in the wake of the financial crisis. Alternative sources of finance have the potential to supplement bank lending in the funding of young, growing and innovative businesses. Generally speaking, these businesses are too small to benefit from public equity markets, and instead look to funding sources such as peer-to-peer lending, crowdfunding, venture capital funds and business angels.

At present, however, alternative sources of funding are substantially underdeveloped in the EU in comparison to other parts of the world, such as the USA. Perhaps unsurprisingly, the EU lags behind the US when it comes to producing young innovative business leaders in fast-moving sectors.

It is in this context that the Commission has requested a study of tax incentives for venture capital and business angels, to see how such incentives can foster investment into SMEs and start-ups. In order to ensure adequate financing of young, growing and innovative businesses, both in terms of volume and structure of funding available, many stakeholders argue that taxation should foster long-term investment in enterprises with higher risk and reward profiles. Indeed, an increasing number of Member States are already encouraging business angel and venture capital investment through directly targeted tax incentives as a means of increasing the supply of early stage venture capital.

However, there is little evidence of the impact of these forms of intervention, with some research showing positive impacts in terms of additionality and some showing significant downside risks generated by poor targeting and coherence. Monitoring and evaluation is thus extremely important to ensure such schemes create good value for public money. Systematic measurement, not just of investment activity, but also of the results of that investment activity is essential.


Objectives of this study

·         to provide a mapping and analysis of the design, functioning and the impact of tax incentives promoting investment into young and growing innovative companies in the EU and beyond;

·         based on the above assessment, to benchmark the tax schemes of all EU member states and eight additional countries; and 

·         to arrive at a number of good practices in the identified design features which should serve as a basis for an exchange of knowledge between Member States.



Directorate General Taxation and Customs Union (DG TAXUD)


Project leader

PwC – PricewaterhouseCoopers LLP, London



IHS - Institute for Advanced Studies, Vienna (consortium leader)