Legal limits to promoting equity capital investments using fiscal measures - State aid perspective

Abstract: This contribution explores the area of tax law pertaining to treatment of debt and equity finance as well as devises recommendations for Member States of the European Union seeking to promote equity participation without the risk of infringing upon Community law provisions relating to State aid. The study begins with the presentation of the underlying issues pertaining to the choice between debt and equity finance as well as the notion of State aid as applicable in the field of fiscal measures. Thereafter, an analytical framework for classifying legislative instruments by types of investment which they support is adopted. The examination of legislative tools which have been enquired into by the Commission and Community courts leads to the finding that that the promotion of internal financing is likely to be considered as conflicting with the rules on State aid. After reaching this conclusion, the second category of fiscal measures, i.e. supporting external financing is discussed. Here, fewer contentious areas are identified although it is highlighted that State aid provisions bring about consequences which are difficult to foresee at the time of drafting legislation. Bearing this in mind, safe harbours which exist with regard to a small area of support concerning risk capital investments are presented. Having identified attributes which contribute to the finding of unlawful aid, recommendation to submit new fiscal measures for the review by the Commission in accordance with the procedure provided for in the Treaty on the Functioning of the European Union is formulated.