Frontpage News 2014 Analysis: Better t...

Analysis: Better tax terms will create growth

13 March 2014

Healthy and sound companies already have the option of obtaining risk capital. But especially by improving the tax terms - and by adjusting the different support schemes - particularly small and medium-sized businesses' access to risk capital can be increased, and thereby the coveted growth in the Danish society will be strengthened. This is according to a report which a number of financial organisations have just published.

The terms of attracting risk capital to small and medium-sized businesses should be improved. This can be done by reducing a number of regulatory barriers - particularly tax - while adjusting different support schemes. An easier access and better conditions for investment in small and medium-sized enterprises will strengthen the coveted growth in the Danish society.
 
This is the main conclusion in a new analysis, ’’Report on risk capital’’ which has just been published.
 
Credit crunch discussion has been lively in recent years. The banks have been criticised for being too restrictive in their lending to small and medium-sized businesses. At the same time, the banks have reported declining demand for loans and expressed their willingness to lend - even if the crisis has increased the risk of loss.

"The discussion has, however, missed the elements on whether SMEs have a sufficient amount of risk capital in the form of equity and other liable capital, as well as whether the terms on attracting risk capital are appropriate," says Executive Director at the Danish Bankers Association Søren Gade.
 
Therefore, ATP, DVCA, the Danish Insurance Association, the Danish Bankers Association, the Danish Mortgage Banks' Federation and the Association of Danish Mortgage Banks have analysed the credit granting to SMEs and the market for risk capital and the barriers that hinder the injection of capital. 

Larger companies have easier access

The report includes several analyses of the SMEs' financing terms. Among other things, the different types of loan- and financing sources and the different actors in the credit and capital area are highlighted.
 
Not unexpectedly, the larger companies easier attract capital from various places, including from the international capital markets, than smaller firms.
 
"At the same time, the crisis has generally affected the SMEs relatively hard, which is reflected in lower solidity and lacking equity. It has undoubtedly made it more difficult to get credit approval from banks and mortgage lenders. It supports one of the report's conclusions - there is a need for more equity in the companies, "says Søren Gade.
 
The small and medium-sized businesses have i.a. been analysed on their success rates in debt- and equity financing - including the geographical location of the companies and by industry level. There has also been focused on how the large amount of new and tighter regulation affects the financial sector and its companies' willingness to invest.
 

Regulation inhibits investment

"The report states that financial tightening has a negative impact on the small businesses’ financing conditions. It hits the SME segment harder because they are more dependent on debt financing from banks, and this need cannot be fully covered by, for example, pension funds, which have a different business model, " Søren Gade says. He adds that even tax rules may have an adverse effect on investments. For example, the share income tax must, according to the pension associations, be changed, and it will benefit the SME segment to introduce a dual income tax system as known from Norway and Sweden.
 
The report identifies a number of specific initiatives and actions that will facilitate access to capital and help the various players in the market for capital. This is relevant not only for the tax and regulatory issues in areas such as agriculture and public support schemes, where the report, for example, proposes to gather the public debt- and equity instruments, so that the expertise is gathered in one place and provides a better overview of the different initiatives. 
 
The initiatives from the Report on risk capital are gathered below.
 
Better access to risk capital
Initiatives in the tax area:
 
  • The taxation of dividends is changed. A model for taxation according to the share premium rules, where it is proven that there are actual gains, is introduced.
  • The opportunities for amortisation of research- and experimentation expenses are improved to ensure equality between small development companies and large corporations.
  • The tax system is moved in the direction of a dual income tax system, as is the case in the other Nordic countries, which has a positive effect on the economy.
  • The terms for equity are improved so that businesses are being encouraged to build more equity for example through e.g. lower corporate taxes, or by introducing an equity deduction.
  • The entrepreneurial tax is abolished for the Danish minority shareholders who invest in unlisted shares.
 
Initiatives in relation to the existing regulation:
 
  • Investments in unlisted shares can be facilitated via pension deposits in the banks by reducing the administrative requirements of the scheme and reduce the threshold for investment.
  • Denmark participates actively in the review of the FAIF Directive with the specific aim of removing unnecessary administrative burdens.
  • The exemption for pension schemes under the EMIR rules is maintained, so the pension companies avoid a major capital stock, which reduces returns for the customers.
  • The Solvency II rules are amended to ensure less solvency stress for high-quality securitisations.
 
Initiatives in relation to agriculture:
 
  • Barriers to company formation in the Agricultural Act are removed in accordance with the government's Growth Plan for Food (2013).
 
Initiatives in relation to public support schemes, etc.:
 
  • Create one access point to public debt- and capital instruments, so the expertise is gathered in one place and provides a better overview of the different approaches.
  • Reintroduce the possibility of large growth collateral, so the Danish Growth Fund becomes more willing to take risks and stand forward where the market hesitates.
  • Maintain and expand the system of syndicated loans after 2015 while creating the possibility that super-angels can be approved in line with venture funds.
  • Establish cooperation between the relevant industry organizations and the public to ensure more targeted information to owner-managed businesses to "professionalise" the companies.
 
The report on risk capital (in Danish) 
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