The tax benefits for investments in innovative startups and SMEs: Let’s get some clarity
Surely one of the most interesting rules introduced into legislature which favours the Italian Venture Capital ecosystem is that of the tax benefits for startup and SME investors. It’s a dynamic rule that was introduced in 2012 with decree-law 18 October 2012, n.179 and has undergone several modifications during several Budget Laws in 2016, 2017, 2019 and the most recent being the Recovery Decree of 2020. It is, therefore, helpful to clarify the matter for the sake of both investors and entrepreneurs.
What did the law introduced in the 2019 Budget provide?
• Individuals liable to personal income tax (IRPEF) may deduct from gross tax an amount equal to 30% of the investments made in eligible startups or innovative SMEs, for an amount not exceeding €1,000,000, in each tax period and up to the third year from the investment, if the deduction due is greater than the amount deductible in the reference year; –
• Corporate income tax (IRES) taxable persons may deduct from gross tax an amount equal to 30% of the investments made in eligible startups or innovative SMEs, for an amount not exceeding €1,800,000, in each tax period and up to the third year from the investment, if the deduction due is higher than the amount deductible in the reference year;-
• The relief is granted also in case the investment is made indirectly through collective investment undertakings (UCIs) or other capital companies that invest mainly in eligible innovative start-ups or innovative SMEs (e.g. holding companies and capital club deals); however, in case the latter are not listed on a regulated market or an MTF, the relief is granted only in proportion to the investments made in innovative start-ups or innovative SMEs eligible by such companies, as resulting from the financial statements for the year in which the relief investment is made. -·
• The tax benefits are also available if the investment is made in eligible start-ups or innovative SMEs, including those not resident in Italy, provided that they meet the same requirements, where compatible, provided that they are resident in EU Member States or in States that are parties to the Agreement on the European Economic Area and have a production site or branch in Italy (presence of a permanent establishment) and in any case concerning the part corresponding to the increases in the endowment fund of the same permanent establishments.
APPLICATION AND RECOGNITION OF THE BENEFIT
• The tax benefits for investments in start-ups and innovative SMEs shall apply to cash contributions recorded under the item “share capital and share premium reserve” of the shares or units of innovative start-ups, eligible innovative SMEs or limited liability companies investing mainly in innovative start-ups or eligible innovative SMEs, also following the conversion of bonds convertible into newly issued shares or units, as well as investments in units of collective investment undertakings;
• For the foregoing, the offsetting of claims upon subscription of capital increases shall also be considered as a cash contribution, except for claims resulting from certain sales of goods or provision of services;
• The above contributions shall be recorded, in the current tax period, on the date of filing for registration in the Companies’ Register of the memorandum of association or the resolution to increase the share capital or, if later, on the date of filing of the certificate that the capital increase has been carried out following Articles 2444 and 2481-bis of the Civil Code;
• Investments in units of Undertakings for Collective Investment Schemes (UCIs), and those made through other limited liability companies investing mainly in innovative start-ups or eligible innovative SMEs, shall be taken over at the date of subscription of the units;
• Contributions arising from the conversion of convertible bonds are recognised in the tax period current on the date on which the conversion takes effect;
CONDITIONS TO BENEFIT FROM THE TAX BENEFITS
The benefits are granted on condition that the beneficiaries receive and retain them:
• A certification of the eligible startup or innovative SME certifying that it has not exceeded the cumulative limit of eligible contributions of €15,000,000;
• A copy of the investment plan of the eligible innovative startup or innovative SME (Business Plan);
• In the case of indirect investments through UCIs or joint-stock companies investing mainly in innovative startups or eligible innovative SMEs, a certificate produced by the joint-stock company or UCI is also required to certify compliance with the requirements of the standard for facilitation and the amount of the investment actually eligible for facilitation according to the share allocated to eligible innovative startups or SMEs out of the total investment.
FORFEITURE OF TAX BENEFITS
Entitlement to benefits expires if, within three years of the date on which it takes over the investment, it occurs:
• The sale, even partial, of the shareholdings or units received in exchange for the subsidised investments;
• The reduction of capital as well as the distribution of reserves or other funds set up with share premiums on the shares or units of eligible innovative start-ups or eligible innovative SMEs or other companies investing mainly in innovative start-ups or eligible innovative SMEs and whose shares are not listed on a regulated market or an MTF;
• Withdrawal or exclusion of investors who are subject to personal income tax (IRPEF);
• The loss of even one of the requirements for maintaining innovative start-up status except for the following:
◦ Expiry of five years from the date of establishment;
◦ Exceeding the annual production value threshold of €5,000,000;
◦ Listing on an MTF;
◦ Acquisition of the eligible innovative SME requirements;
• The loss of even one of the requirements necessary to maintain the status of eligible innovative SME except for the following:
◦ Exceeding the size thresholds set out in the Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (2003/361/EC);
◦ Listing on the regulated market.
What changes following the 2020 Revitalisation Decree?
The main tax benefit concerns the increase of the IRPEF deduction to 50% of the amounts invested in the share capital of eligible start-ups and innovative SMEs, originally envisaged at 30%, up to a maximum of €100,000 per year, both in the case of direct and indirect investments through UCITS.
The measure should be considered as “supplementary” to the rules already in force and introduced by the 2019 Budget Law described above.
The most evident criticality of the latter regulatory intervention is clearly that it excludes from the increase in benefits investments made through IRES entities referred to in article 73 of Presidential Decree no. 917 of 22 December 1986 (“TUIR”), even though they are qualified as entities that invest mainly in start-ups or innovative SMEs.