Europe has long been recognised as a centre for innovation. In recent years, the tech startup ecosystem has experienced remarkable resilience across the continent in spite of economic downturns due to COVID-19 and the subsequent war in Ukraine.
This is, in part, due to numerous European countries having implemented tax relief programs tailored for startups and investors.
These programs contribute to making the region increasingly attractive for entrepreneurs looking to establish or expand their businesses.
In this article, I’ll delve into the top 10 European countries offering the most advantageous tax relief schemes for startups.
From the United Kingdom’s well-established Seed Enterprise Investment Scheme (SEIS) to more region-specific initiatives in countries like Spain, I’ll explore the diverse range of incentives available.
By comprehending the various options at your disposal, you can make well-informed decisions about where to launch and develop your startup and ultimately maximize the benefits of these favourable tax climates.
The Portuguese main tax incentives towards early-stage startups are based on the Enterprise Investment Scheme (UK) model. It is possible for a 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.
They can then 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. Alternatively, they can contact FNABA (Federaçao Nacional de Associaçoes de Business Angels) to obtain specific information.
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Do you have a Micro-enterprise, Startup or SME (Small-to-Medium Enterprise) founded no more than 4 years ago?
The Belgian Tax shelter can help you raise 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:
- Your Company must be registered in Belgium.
- Your Seed (or Series Funding) must happen within the fourth year since the Company was founded.
- Your funds raised under the tax shelter must not exceed €250,000.
- Your Company must not be involved in an insolvency process.
- Your Company must operate in an industry different from the following:
- Treasury, investment or financing
- Real Estate (construction, acquisition, management, development, sale, rental, etc.).
- After having raised funds under the tax shelter, you can no longer modify the industry of your business to the aforementioned ones.
- Your Company must not be the result of a merger or a corporate spin-off.
- Your company:
- Must not be listed
- Must not have yet distributed dividends
- Be 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 then be able to claim a tax reduction of 30% (if the investment has been made into an SME) or 45% (if Micro-enterprise) of the amount invested on their annual tax declaration.
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France offers several benefits for both startups and their investors.
Business Angels benefit from an income tax reduction of 18% of the amount invested with a 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. Also, 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.
In case of the sale of shares with gain, taxed as general income on income tax at progressive rates (with a marginal rate of 45%).
A deduction allowance of 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 are 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%).
For investors to fulfil these advantages, your startup must comply with the following standards:
- It must be an SME: (i) ≤ 50 employees (ii) ≤ €10 Mln Turnover (iii) ≤ €10 Mln Assets
- It must be located in France or the EU Area
- It must carry out an operational activity (no financial or real estate).
Unfortunately, there’s no specific portal for you to access this allowance. Therefore you will have to get in touch with a French Accountant.
Your startup’s attractiveness to investors has changed a lot since 2013. In that year Germany launched a grant, called INVEST, specifically designed for Business Angels.
The idea is that you can purchase shares in an innovative startup and 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 investments up to €500,000 per year.
Since 2017, in case of the disposal of a share, angel investors can compensate the taxes paid on the profit with an exit grant of 25% of the profit. That applies to the shares whose purchase 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.
To fulfil this advantage, your startup must comply with the following standards:
- It must not be older than 7 years
- It must be an SME:
- ≤ 50 employees
- ≤ €10 Million Turnover
- ≤ €10 Million Assets
- The Company has its headquarters in the EEA Area, but one branch must be permanently established in Germany
- Your Startup must not be dominated by a parent company
- The Company must be innovative, i.e.:
- Belong to an innovative sector listed by the Federal Office of Statistics.
- Own an up-to-15-year-old patent
- Have received public support for research or innovation projects within the 2 years preceding the application
Proved to be innovative by the expert opinion of an independent assessor listed on the website of BAFA.
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. EII 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; have their issued share capital fully paid up; and do not intend to wind up within 3 years of receiving investment via this scheme, unless it is for bonafide 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:
- Adventures or concerns in the nature of trade
- Dealing in commodities or futures in shares, securities or other financial assets
- Financing activities
- Dealing in or developing land
- 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
- Operating or managing nursing homes or residential care homes or managing property used as a nursing home or residential care home
- Operations carried on in the coal industry or the steel and shipbuilding sectors
- Movie Production
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, you can offset such gains with the losses realised on the disposal of participations of the same category.
As in France, you don’t have a specific portal to access these allowances, therefore I suggest getting in touch with an Italian-based accountant, they’ll be happy to help.
Alternatively, get in touch with me, I can also make some bridges to a couple of startup-friendly accountants.
The Spanish startup environment is not as mature as in other countries. However, 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. But only if the investment is done in a new or recently created company. The following aspects must also be respected:
- 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
- The investment must be towards a Corporate Company
- The company must have adequate resources to undertake Corporate activity
- The equity of the company may not exceed €400,000 at the time of the application for deduction
Moreover, depending on 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. To qualify for this your startup must have been incorporated no 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 — 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 20% of the investment in your startup with a maximum amount of €4,000. Here the maximum stake is set at 40%.
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. This is equivalent to acquiring shares for SEK 1.3 million or (~€151,000).
The Tax effect is 15% 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 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 being eligible to offer such advantages to your investors, I suggest you get in touch with Skatteverket, Swedish Fiscal Authority.[/vc_column_text][vc_column_text]
Generally speaking, Swiss Cantons (States) have competitive Corporate Income Tax both on a cantoral and communal level. CIT rates applicable on profit before tax may vary between 11.9% and 21.6%. Moreover, as of January 1st, 2020 cantons have introduced a Patent Box Regime. Also, the Swiss holiday tax remains in place to incentivise the establishment of new businesses in Switzerland to create jobs and encourage business innovation. You may be eligible for up to 10 years. During this period it is possible to obtain a low single-digit tax rate. A quick note that it is the government and not the tax authority that grants tax holidays
If you want to incorporate in Switzerland I would first suggest checking out this full guide.[/vc_column_text][vc_column_text]
10. The United Kingdom
The UK has four different Venture Capital Schemes: SEIS, EIS, SITR and VCT.
The Seed Enterprise Investment Scheme (SEIS) is 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 Does it Attract Investors?
It attracts investors due to the following three levels of advantages:
- Investors are immediately provided with 50% of their investment back in income tax relief (max of £100,000 invested per year).
- 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.
- Capital Gain Tax paid on a previous investment realised in the current or previous year can be reduced by 50% if reinvested into a SEIS-eligible business.
If you would like more information on setting up your startup in the UK, I have written a 5 step guide to get you set up in just one week!
As you can see, the SEIS is the most advanced and easily approachable relief that is currently available in Europe. However, there are plenty of options across the continent that will give you a great chance of starting a business once the dust has settled and life begins to return to normality.
Though tax reliefs represent a necessary condition for you to choose the country in which you incorporate your startup they are not enough to make the decision. Don’t forget to assess the advantages that European countries may offer, such as access to funds, the talent within the country, and other environmental traits linked to your specific business.