Abstract:
The sector of young growth-oriented ventures struggles with a lack of external sources of financing, some of the reasons being a substantial information asymmetry between the capital provider and its recipient, difficult-to-predict development of the investee companies, and market risks. In advanced market economies, venture capital represents a significant source of equity finance at this stage of the company’s life cycle. The Czech Republic as one of the countries within the CEE suffers from an underdevelopment of this financial market sector, with nonexistent provision for suitable legal and organizations forms of venture capital funds in domestic legislation and the method of taxation of investment yields at both fund and investor levels being viewed as some of the causes of this undesirable state of affairs. In order to encourage the development of the market, this paper addresses filling the existing research gap concerning the following issues of the Czech informal venture capital market: How the current Czech legislation regulates the legal fund structures for VC investments? What is the tax treatment of VC funds and individual investors in the Czech Republic? What are the legal and tax regulations on the main European markets for venture capital? What are the key requirements for improvements of the current situation on the Czech venture capital market? The nature of this study is explorative and it relies on primary and secondary data. Results of the study stress that as compared to economies boasting developed financial markets, the non-existence of the Limited Partnership legal form in particular is a weak spot of the current Czech legislation. From the perspective of international investors, Limited Partnership is the only comprehensible legal structure for venture capital investments because it offers a desirable flexibility to both domestic and foreign investors and fund managers in the formulation of the fund’s Partnership Agreement. The tax transparency of this structure is also a decisive advantage since yields are not taxed at fund level but rather at the level of the individual investors. The only permissible Czech legal structure for venture capital investments – a qualified investor fund – does not sufficiently accommodate the requirements of market participants. Inadequate manner of market regulations can also be pointed out in addition to inflexible corporate law, tax obstructions and non-transparency of the current structures. The conclusions of the study recommend that following the model provided by selected European countries, such changes be incorporated into corporate law and the regulation of the relevant financial market segment as to create suitable conditions for a successful development of company funding through venture capital.
