Incorporating your Startup in EU? Overview on Tax Reliefs by Country

If you’re considering to setup your startup in EU, this post is for you.
Every founder knows the SEIS for UK-based startups, but what about the other EU Countries? Some of them offer attractive policies that encourage early stage investments from business angels that you might benefit from.

With the help of Startups’ Founders we are working with at Altar.io, and PwC, I could shortlist the Countries where the tax systems offer some benefits to startups and their investors.

In comparison with US Startups, that historically have been seeking funding from private entities, EU Startups have much more relied on Bank Credit to finance their growth; something has though changed during the Lehman financial crisis, causing those companies to seek funding from business angels and venture capitalists.

To promote so, EU has been actively involved in providing tax incentives / benefits for those who contribute to financing this type of SMEs.

Let’s get deeper in the Countries that present special situations for startups’ investors:


Belgium

Do you have a Micro-enterprise, Startup or an SME founded no more than 4 years ago?
The Belgian Tax shelter can help you raising up to €250,000 to grow your business.
Since February 2017 the tax shelter also applies to companies that raise funds through crowdfunding.

These are the conditions for you to apply:

  1. Your Company must be registered in Belgium
  2. Your Seed (or Series Funding) must happen within the fourth year since the Company was founded
  3. Your funds raised under the tax shelter must not exceed €250,000
  4. Your Company must not be involved in an insolvency process
  5. Your Company must operate in an industry different from the following: (i) Management, (ii) Treasury, investment or financing, (iii) Real Estate (construction, acquisition, management, development, sale, rental, etc.). After having raised funds under the tax shelter, you cannot longer modify the industry of your business to the aforementioned ones
  6. Your Company must not be the result of a merger or a corporate spin-off
  7. You company must not be listed, must not have distributed dividends yet or subject to a capital reduction

If you meet these conditions, you can attract any Belgian taxpayer to invest up to €100,000 per year in your Company.
They will so be able to claim a tax reduction of 30% (in the investment has been made into an SME) or 45% (if Micro-enterprise) of the amount invested on their annual tax declaration.


France

Madelin Provision: Business Angels benefit from an income tax reduction of 18% of the amount invested with the limit of €50,000 (€100,000 for married couples). The investment must be held for at least 5 years and the company must be an SME. In addition, individuals eligible for the wealth tax can invest up to €90,000 and reduce the wealth tax by 50% (thus a maximum wealth tax deduction of €45,000). The wealth tax reduction and the income tax reduction mentioned above cannot be applied to the same single investment.

Capital gains: In case of sale of shares with gain, taxed as general income on income tax at progressive rates (with a marginal rate of 45%), a deduction of allowance up to 65% is applicable if shares are held for at least 8 years or up to 85% if other certain conditions are met. The capital gains are also subject to social contributions (15.5%).

Dividends: taxed as general income on income tax at progressive rates with a top marginal rate of 45% (after 40% allowance applicable to gross dividend when the target is located in France or the EU) plus social contributions (15.5%).

In order for investors to fulfil this advantages, your startup must comply with the following standards:

  1. It must be an SME: (i) ≤ 50 employees (ii) ≤ €10 Mln Turnover (iii) ≤ €10 Mln Assets
  2. It must be located in France or in the EU Area
  3. It must carry out an operational activity (no financial or real estate).

Unfortunately there’s not a specific portal to access this allowance, therefore get in touch with a French Accountant.


Germany

Your startup’s attractiveness to investors has changed a lot since 2013. In that year Germany has launched a grant, called INVEST, specifically designed for Business Angels.

The ideas is that individuals that purchase shares in an innovative startups receive a 20% grant on their investment when they invest, at least, €10,000 per Company.
Angel investors can apply for an acquisition grant for investment up to €500,000 per year.

Since 2017, in case of a shares disposal, it is possible for angel investors to compensate the taxes paid on the profit with an exit grant of 25% of the profit. That applies on the shares whose purchased was carried out with the acquisition grant. The shares must be sold within 10 years and the exit grant must not exceed 80% of the acquisition cost of the acquired shares.

In order to fulfil this advantage, your startup must comply with the following standards:

  1. It must not be older than 7 years
  2. It must be an SME: (i) ≤ 50 employees (ii) ≤ €10 Mln Turnover (iii) ≤ €10 Mln Assets
  3. The Company has its headquarter in the EEA Area, but one branch must be permanently established in Germany
  4. Your Startup must not be dominated by a parent company
  5. The Company must be innovative, i.e.:
  • belonging to an innovative sector listed by the Federal Office of Statistics.
  • is owner of a up-to-15 years old patent
  • has received public support for research or innovation project within the 2 years preceding the application
  • proved to be innovative by an expert opinion of an independent assessor listed on the website of BAFA.

Ireland

The Employment & Investment Incentive (EII) allows individual investors to obtain income tax relief on investments made, in each tax year, into EII certified qualifying companies. The EII replaces the Business Expansion Scheme (BES) and EII will run until 2020.

Companies seeking EII relief must directly seek certification from the Revenue Commissioners. EI has no role in the certification process.

Eligible undertakings are those which at the time of the initial investment are unlisted SMEs and are engaged in a qualifying trade; has its issued share capital fully paid up; and do not intending to wind up within 3 years of receiving investment via this scheme, unless it is for bona fide commercial reasons.

The cumulation limit on EII investment is now €15m as defined under the GBER. The EII is open to the majority of SMEs, however, the following trading activities are not eligible for the scheme:

  1. Adventures or concerns in the nature of trade
  2. Dealing in commodities or futures in shares, securities or other financial assets
  3. Financing activities
  4. Dealing in or developing land
  5. Forestry
  6. Operating or managing hotels, guest houses, self catering accommodation or comparable establishments or managing property used as a hotel, guest house, self catering accommodation or comparable establishment
  7. Operating or managing nursing homes or residential care homes or managing property used as a nursing home or residential care home
  8. Operations carried on in the coal industry or in the steel and shipbuilding sectors
  9. Movies Production

Italy

There are two different scenarios for investors approaching your startup. Dividends and capital gains derived from non-qualified participations (see table below) are subject to a final withholding tax of 26%.

Instead, dividends and capital gains derived from qualified participations are tax-exempt for 50.28% of their amount. The remaining 49.72% is included in the taxable income of the individual shareholder and is subject to individual income tax (“IRPEF”), levied at progressive rates.

Generally speaking, it is possible to offset such gains with the losses realised on the disposal of participations of the same category.

As in France, there’s not a specific portal to access these allowances, therefore I suggest to get in touch with an Italian based accountant, will be happy to help.
Get in touch with me, I can also make some bridges to a couple of startups-friendly accountants.


Portugal

The Portuguese main tax incentives towards early stage startups is based on the Enterprise Investment Scheme (UK) model. Any Business Angel, who is certified by IAPMEI (Governmental Small and Medium Enterprise Agency) and makes a certified investment in an SME (or startup) less than 3 years old, can claim a deduction on the individual income tax of 20% of the investment made in the Startup. The 20% deduction must not exceed 15% of the income tax. Business Angels who want to claim this business angel incentive must contact IAPMEI to apply for it, or contact FNABA (Federaçao Nacional de Associaçoes de Business Angels) or APBA (Associação Portuguesa de Business Angels) to obtain specific information.

Note: at Altar.io we also help Series-level startups setting up their tech team in Lisbon, due to extreme beneficial conditions for tech companies in terms of HR value for money; we have already helped the Swiss Apiax and Systemorph doing that.
If interested, get in touch, glad to help.


Spain

Spanish Startups’ environment is not as mature as in other Countries, but the Government’s latest moves are pushing in that direction. There are some fiscal advantages for business angels investing in Spanish Startups:

Business angels can apply for a deduction of 20% on investment income tax (IRPF) up to a maximum of €50,000 if the investment is done in a new or recently created company and the following are respected:

  1. The shares must be acquired at the time of the incorporation of the company or through a capital increase within the three years since the incorporation
  2. The investment must be towards a Corporate Company
  3. The company must have the adequate resources to undertake the Corporate activity
  4. The equity of the company may not exceed €400,000 at the time of the application for deduction

Moreover, depending where your investors are located, they can benefit from additional relief:

In Catalonia, the business angel can also apply for a regional deduction in terms of income tax (IRPF) for stock acquisitions in your startup if it’s been incorporated not more than 3 years before the investment. The taxpayer, in the income tax part corresponding to Catalonia Region, will have a deduction of 30% of the money invested in with a maximum deduction of €6,000. Bear in mind the investor cannot acquire more than 35% of the Capital.

The Royal Decree 1/2010 establishes a similar measure in the income tax for Madrid Business angels. In this case, the deduction will be the 20% of the investment in your startup with maximum amount of €4,000. Here the maximum stake is set at 40%.


Sweden

Since 1st December 2013, business angels investing as private individuals who acquire shares in a Startup are allowed to deduct half of what they pay for their shares. The maximum deduction is SEK650,000 (~€75,500) per person per year (equivalent to acquiring shares for SEK 1.3 million or (~€151,000).

The Tax effect is 15 percent of the amount paid, up to a maximum of SEK 195,000 (~€22,650) per person and year. The total sum paid by the investor for their shares in one and the same company is limited to a maximum of SEK 20 million (~€2.3 million) per year.

If you’re a startup and would like to know more about the criteria to respect to be eligible to offer such advantages to your investors, get in touch with Skatteverket, Swedish Fiscal Authority.


United Kingdom

Despite having 4 Venture Capital Scheme in UK: SEIS, EIS, SITR, VCT, Seed Enterprise Investment Scheme (SEIS) is the one that targets early stage startups: if your company’s been trading for less than 2 years, with less than £200,000 of assets, you may be able to attract investment of up to £150,000.

These are the conditions for you to apply:

  • Your startup is registered in the UK
  • Your startup owns up to £200,000 in assets (group’s assets if your company has subsidiaries)
  • Your startup doesn’t control another company unless that company is a subsidiary
  • Your startup isn’t controlled by another company
  • Your startup has less than 25 full-time equivalent employees at the time the shares are issued. If your company has any subsidiaries, this applies to the whole corporate group
  • Your startup hasn’t already received investment through the Enterprise Investment Scheme (EIS) or from a venture capital trust

Why should it attract investors?
Three levels of advantages:

  1. Investors are immediately provided with 50% of their investment back in income tax relief (max of £100,000 invested per year)
  2. Investors can benefit from 100% tax relief on profits (if the company succeeds and the shares are sold) or may offset their loss against their income tax if the company fails
  3. Capital Gain Tax paid on a previous investment realised in the current or previous year can be reduced by 50% if reinvested into an SEIS eligible business

As you can see, the SEIS is the most advanced and easily approachable relief that, at the moment, is live in Europe.
Though, tax reliefs represent a necessary, but not sufficient, condition for you to choose the Country where to incorporate your startup.
Don’t forget to assess the advantages that EU Countries may offer, such as as access to funds, talents, and other environment traits linked to your specific business.

Good Luck!


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