The European Commission (Commission) has opened a formal investigation into plans by the German Government to offer tax advantages for venture capital companies and individuals investing in certain target companies. It has raised concerns over whether the proposals are in line with the EU's Guidelines on Risk Capital Investment (Guidelines). In particular, there are concerns around whether the measures may favour certain companies in a selective manner (e.g. if venture capital companies have the right to deduct losses of target enterprises in a way which other investors could not), and the planned measures do not appear to exclude the grant of risk capital to large enterprises and firms in difficulty (as required under the Guidelines). The Commission has also raised a query over whether the requirement that venture capital companies have their legal headquarters in Germany to benefit from the tax advantage complies with the rules on the free movement of capital (Article 43 EC). The German Government will now have an opportunity to respond to the issues that have been raised.