The debate post was published in the Danish Newspaper Børsen by Mikkel Fruergaard, CEO.
At CVX Ventures, we help entrepreneurs gain access to venture capital, and here we face daily challenges that hinder the growth of Danish entrepreneurship. One of these problems is tax rules that penalize investing in startups when more than seven investors join forces. A response from the Danish tax authorities has revealed that when eight or more investors form a syndicate to invest in a startup or scale-up, they are taxed on their investment.
This rule does not apply if there are seven or fewer investors. This creates an absurd situation where investors are penalized for cooperating in larger groups. The problems with this tax legislation are manifold. Firstly, it raises the question of how to truly assess the value of these startups year after year – a task that is both subjective and complicated. Secondly, it creates an unnecessary administrative and financial burden for startups that want to avoid an overloaded capital table and therefore prefer investors to join together in syndicates.
We see every day how smaller investors want to contribute to growth successes. But rules like these discourage them from investing, as it is too costly to set up and manage a Special Purpose Vehicle (SPV) for a small group of investors. Ironically, it would be possible for 14 investors to avoid inventory taxation if they split into two syndicates of seven each. But a single syndicate of 14 investors is penalized. Where’s the logic in that?
This leads to the overarching question: Why do we make it so difficult for entrepreneurs and their investors in Denmark? Why are we perpetuating rules that create more bureaucracy and obstacles, rather than easing the path for those willing to take a financial risk to support innovation and growth?
It’s about time for lawmakers to reconsider and revise these tax rules. By removing these tax obstacles, we can create a more entrepreneurial environment where startups can thrive and grow. This is not only in the interest of investors and entrepreneurs, but in the interest of society as a whole.
