Tax relief at risk – what you need to do to protect it

Tax relief at risk – what you need to do to protect it

Tax relief at risk

How to protect it

For startups and innovative SMEs, it is essential to be aware of the tax benefit rules that apply to investments so that investors do not lose the opportunity to profit from them.

There are many good reasons that should push startups and SMEs to create a business plan including:

1. Determine the profitability and sustainability of the business model over a medium to long period of time

2. Define the investment plan and the resulting financial requirements to implement the plan

3. Provide for and plan the use of external capital to finance it.

In addition to these good reasons, there is another equally important reason for obtaining tax relief for investors in innovative companies.

First of all, what are the tax incentives for investment in innovative start-ups and SMEs?

For 2020 individuals can benefit from a deduction from income tax (IRPEF) equal to 50% of the amount invested, for a maximum deductible amount of €100K: corporations, on the other hand, can benefit from a deduction from the amount taxable for IRES purposes equal to 30% of the investment, with a threshold set at €1.8 million per tax period.

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Additional investments

An investor investing for the first time in an innovative startup or SME, within the aforementioned limits and time limits, will receive such tax relief. However, if the investor in question decided to make a further investment in the same company, the entitlement to the benefit would be seriously questioned.

In fact, the Decree of May 7, 2019 governing the implementation of tax incentives for investments in innovative start-ups and innovative SMEs in Article 2, paragraph 3, letter d) provides that the benefits apply (in the case of direct or indirect investment) “to persons who hold equity interests, securities or rights in the innovative start-up or innovative SME eligible for investment, with the exception of investments additional to the conditions set out in paragraph 6 of Article 21 of Regulation (EU) No 651/2014″.

Therefore, the decree:

– always admits to the benefit the investments made when setting up an innovative startup,

– and instead excludes from the benefit of the benefit those who already owned shares in the startup object of “follow-on” investment (follow-on) unless the three conditions indicated in Article 21, paragraph 6 of Regulation (EU) No. 651/2014 are met.

Paragraph 6 of the abovementioned European Regulation states that the following conditions must be fulfilled in order for the entity making the ‘further’ investment to benefit from the facility:

1. the total amount of risk funding referred to in paragraph 9 [EUR 15 million] shall not be exceeded;

2. the possibility of further investment was foreseen in the initial business plan;

3. the enterprise subject to further investment has not become affiliated, within the meaning of Article 3(3) of Annex I, with another enterprise other than the financial intermediary or independent private investor financing the risk under the measure, unless the resulting new enterprise meets the conditions of the definition of an SME.

Therefore, from the combined measures of the above mentioned provisions, pending clarification by the financial administration, a person (natural or legal person) making a “further” investment in an innovative startup could take advantage of the facility only if the possibility of further investments has been provided for in the business plan of the company prepared during the establishment phase.

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