German Risk Finance


Relatively few risk finance measures are notified to the Commission as Member States use Articles 21 and 22 of the GBER to support investments in SMEs and start-ups. However, the GBER excludes from its scope tax incentives for investments by undertakings. Tax incentives are possible only for investments by private investors.

For this reason, Germany recently notified an aid measure which involved direct grants for risk capital investments, which were open to business angels who qualify as undertakings. An earlier version of the measure had been approved by the Commission in 2013 under the 2006 Risk Capital Guidelines. That version was later prolonged and revised twice in 2016 and 2020. The latest amendment that is reviewed in this article was approved by the Commission under number SA.105224.[1]

The previous scheme supported investments by private investors (natural persons) in small, young and innovative companies with a tax-free acquisition grant. In 2017, another type of support was added in the form of an exit grant. This was a flat rate compensation for taxes payable on capital gains resulting from a profitable sale of the shares for which an acquisition grant had been awarded.

A study carried out by Germany showed that additional incentives were necessary. The notification included, in addition to the prolongation of the previous scheme, the following amendments: “(6) (a) increase of the acquisition grant from the current 20% to 25% of the investment; (b) adjustment of investment limits per investee companies and for exit grants; (c) introduction of an ‘INVEST budget’; (d) inclusion of ‘registered cooperatives’ (‘Eingetragene Genossenschaften‘) as a possible legal form of establishment for eligible undertakings (‘investees’).”

“(7) The INVEST Guidelines require that investors must take into consideration Germany’s Sustainable Development Strategy when choosing their investment target, notably sustainability goal 9 (infrastructure, investment, innovation) and 8 (inclusive and sustainable economic growth and employment).”

The objective, duration and budget of the measure

The notified scheme aims at incentivising investment of private risk capital for small, young and innovative enterprises in Germany and to support “business angels” who can also provide advice and guidance in addition to funds

The scheme will be in force until 31 December 2026 (for acquisition grants) and until 30 June 2037 (for exit grants).

The budget of the measure is EUR 184 million or about EUR 46 million per year.

Form of aid

Acquisition grants

The scheme provides for direct grants to natural persons who acquire in their own name, and at their own expense, risk-bearing equity shares, that are newly issued by eligible undertakings through a capital increase.

The acquisition grant amounts to 25% of the acquisition costs and is subject to both a minimum and a maximum limit. The minimum investment amount is EUR 10,000. This means that the minimum acquisition grant per investor is EUR 2,500. The maximum investment amount is EUR 400,000, entailing a maximum grant of EUR 100,000.

The investment must be commercially viable, based on a credible business plan and must not be financed through loans.

There is also a maximum investment amount per investee company of EUR 200,000 for which an investor can claim an acquisition grant. This implies that the maximum acquisition grant per investment into any individual undertaking is EUR 50,000. It also follows that, under these conditions, an investor must invest in at least two different undertakings to obtain the maximum acquisition grant of EUR 100,000.

The total number of investors in any one undertaking benefiting from the measure may not exceed 10 persons. The total amount of past and future risk capital into any one undertaking is EUR 15 million.

Exit grants

Investors are also eligible for an exit grant if they sell their shares within ten years from the acquisition of the shares. The exit grant amounts to 25% of the profit resulting from the sale of the shares for which an acquisition grant was awarded. The exit grant may only be as high as the acquisition grant, i.e. 25% of the total investment. This means that the combined acquisition and exit grant can only account for a maximum of 50% of the investment amount. Follow-on investments are not allowed.

The acquisition and exit grants are exempted from income tax.

Eligible investors

Only natural persons and business angels are eligible under the measure. They must have no prior relationship with the companies in which they invest, but they do not have to reside in Germany. They must hold the shares they acquire for a minimum of three and a maximum of ten years.

Eligible undertakings

An undertaking is eligible if it satisfies the following conditions:

It must be a small enterprise, not older than seven years, must have commercial presence in Germany, must not be an undertaking in difficulty, must not be listed on a stock exchange or a regulated market, must not be planning to merge with another company, has to use the financial resources it obtains for a business activity in an innovative sector, and must receive funds through the issuing of new shares. That is, new funds cannot replace existing capital or repay loans.

In addition, cooperative societies are also eligible undertakings.

Compatibility of the aid

There was no doubt that the measure constituted State aid, therefore, the Commission dealt with the assessment of the presence of State aid in a mere six paragraphs. It concluded that the undertakings invested in received State aid as well as the private investors who acted as business angels because they became involved in the day-to-day decisions of the companies in which they invested. Other private investors were not undertakings so their tax benefits did not count as State aid.

The assessment of the compatibility of the aid with the internal market was based on the Risk Finance Guidelines. But, first, the Commission explained that “(68) the measure does not fall entirely within the scope of Article 21(3) of Commission Regulation (EU) No 651/2014 (the ‘GBER’), since that provision only covers the granting of risk finance aid in the form of fiscal incentives to private investors that are exclusively natural persons. The Commission will therefore examine whether the measure, given that it falls outside the scope of the GBER due to its design parameters (see paragraph 33(d) of the Risk Finance Guidelines), may be deemed compatible with the internal market.”

Next, the Commission examined to whom the measure applied. “(72) Paragraph 23 of the Risk Finance Guidelines provides that aid to large enterprises is, as a rule, not covered by those Guidelines. That requirement is met, as the measure provides that eligible undertakings are only small enterprises (see recital (28)). In addition, measure is in line with paragraph 24 of the Risk Finance Guidelines, which excludes companies listed on the official list of a regulated market from their scope. That requirement is met (see recital (28)).”

“(73) Further, paragraph 25 of the Risk Finance Guidelines states that any risk finance aid measure that does not involve private investors will not be considered compatible with the internal market under those Guidelines, while paragraph 26 excludes from the scope of those Guidelines risk finance aid where private investors do not undertake any appreciable risk, and/or where the benefits flow entirely to the private investors. Under the measure, private investors will have to finance the investment from their own resources and are exposed to the risk of poor performance or capital loss on their investment. Although the acquisition and exit grants improve performance of the investment, investors remain – in a meaningful manner – exposed to the future performance of their investments both on the upside and on the downside. Therefore, the measure meets the requirements of paragraphs 25 and 26 of the Risk Finance Guidelines.”

Positive effects

Then, the Commission examined the expected positive effects of the aid and began by verifying that i) the measure could support the development of economic activity in line with Article 107(3)(c), that ii) it did not infringe any other provision of EU law and that iii) it had an incentive effect.

With respect to the latter criterion, the Commission recalled that “(81) paragraph 45 of the Risk Finance Guidelines specifies that ‘A risk finance measure is considered to have an incentive effect if it mobilises investments from market sources so that the total financing provided to the eligible undertakings exceeds the budget of the measure’.”

“(82) The Commission notes that by improving the investment returns for the investors via the acquisition and exit grants, the measure encourages investors to make risk finance investments which they would not have made without the incentives.”

“(83) In the ex ante assessment, the German authorities have estimated that the existing aid scheme has had a net positive mobilisation effect of 50%, i.e. each EUR of grants under that scheme has led to EUR 1.5 investments in investee companies (see recital (49)), meaning that the total financing provided to the eligible undertakings has exceeded the budget of the existing aid scheme by 50%. The Commission thus considers that the evidence demonstrates an incentive effect on an overall basis.”

“(84) While a dead-weight effect has occurred for, according to one study, ca. 40% of the investors (see recital (48)), a share of investors (20%) would not have invested without the aid under the existing aid scheme (see recital (46)), and a share of companies have received higher financing amounts (27%) (see recital (47)). Estimates also show that the measure increases the probability of the target undertakings receiving risk capital by 37% (see recital (50)). It has been also found that companies supported under the existing aid scheme have received on average 55% to 61% higher financing amounts than comparable small, young and innovative companies that did not benefit from such support (see recital (50)).”

It is interesting that the Commission acknowledged that the state intervention also caused “dead-weight”. Dead-weight occurs when State aid supports an activity at the expense of another or supports an activity that would have happened anyway.

The Commission continued that “(85) the ex ante assessment has also shown that the incentive effect of grants under the existing aid scheme has been larger for smaller investment amounts and decreases as the amount of financing increases (see recital (51)).” And “(86) the ex ante assessment has shown the highest mobilisation effects are expected to stem from inexperienced business angels (see recital (54)).”

The Commission also noted “(87) that the ex ante assessment has also addressed the effect of acquisition and exit grants, showing that exit grants have a positive incentive effect especially on inexperienced business angels (see recital (52)).”

Negative effects

Next, the Commission turned its attention to possible negative effects of the aid.

“(90) The Risk Finance Guidelines clarify that ‘in order to establish if the distortive effects of the aid are limited to the minimum, the Commission will verify whether the aid is necessary (see section 3.2.2), appropriate (see section 3.2.3), and proportionate (see section 3.2.4). To enable it to carry out that verification, the Commission requires that Member States submit evidence in the form of an ex ante assessment as described in Section 3.2.1’.”

The Commission went on to confirm the need for state intervention, as demonstrated by a gap in the market for funding of young, innovative companies and also in respect of the relative scarcity of business angels. “(93) The Commission notes that the evidence provided by the ex ante assessment’s review of the academic literature and an econometric analysis of the existing measure demonstrate that small, young and innovative companies are afflicted by a market failure (see recital (40)).”

With respect to the appropriateness of the aid, “(97) the acquisition grant can be considered as an equivalent to an income tax relief, and the exit grant as an equivalent to a capital gains tax relief (see recital (55) of the 2016 Decision). Thus, the relevant provisions of the Risk Finance Guidelines for the assessment of appropriateness, as listed in section of those Guidelines have to be applied mutatis mutandis. The Commission thus considers that acquisition grants and exit grants are appropriate instruments (see recitals (57) and (58) of the 2016 Decision).”

Then the Commission made the following interesting statement. “(99) The Risk Finance Guidelines set no limits on tax relief on capital gains, but the Commission notes that the exit grant is limited as a share of the profits and as regards the invested amount (see recital (21)). In conclusion, the Commission finds that both the acquisition and the exit grant can be considered appropriate and that the measure thus meets the criteria laid down in paragraph 124 of the Risk Finance Guidelines.”

With respect to the proportionality of the aid, the Commission considered that the limits on the acquisition and exit grants, and on the total amount of risk finance per recipient undertaking ensured that no excessive aid was granted either to investors or investee companies.

With respect to the avoidance of undue negative effects of risk finance aid on competition and trade, the Commission, first, recalled that “(115) in accordance with paragraph 161 of the Risk Finance Guidelines, ‘[F]or the aid to be compatible, the negative effects of the aid measure in terms of distortions of competition and impact on trade between Member States must be limited and must not outweigh the positive effects of the aid to an extent that would be contrary to the common interest’.”

Then it recounted the expected positive effects of the aid from previous sections of the decision. It also examined the possible negative effects of the aid. In this connection, the Commission noted that “(125) the acquisition and exit grants do not reduce any other incentives for private investors to provide funding to eligible undertakings as they act in a complementary way to other potential financing incentives, nor do the grants eliminate the normal business risk of investments that investors would have undertaken even in its absence.”


The Commission concluded its assessment by balancing of the positive effects against the negative effects of the aid and confirming that the positives would outweigh the negatives.

It noted that “(131) as regards competition distortions at the level of the investors, the measure targets a well-defined market failure, which substantially reduces the risk of crowding out. Private investors are still incentivised to focus on the performance of their investments, the risk investment amounts per undertaking are not excessive, as there is a maximum percentage of the grants to be provided in relation to the invested amount, and the measure targets a specific sub-category of SMEs, namely small, young and innovative enterprises (as opposed to mid-caps and large undertakings).”

“(132) In addition, as regards competition distortions at the level of the target undertakings, the measure explicitly excludes undertakings in difficulty and focuses on young and innovative SMEs (recital (28)). The measure is thus reaching out to growth-oriented undertakings that are unable to attract an adequate level of financing from private resources but may become viable with risk finance aid. The nature and conditions of the acquisition and exit grants incentivises private investors to make a selection of the eligible undertaking they will invest in, based on a commercial logic, as they bear the biggest part of the risk of such investment.”

The Commission concluded that “(133) in light of the foregoing, the measure can be considered to be designed in such a way so as to limit the distortion to competition and minimise undue advantages and its positive effects may be considered to outweigh any potential negative effects on competition in the internal market.”

[1] The full text of the Commission decision can be accessed at:



Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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