Tax incentives for innovative Start-Up companies and approved business incubators

Decree Law no. 179 of 18 October 2012 (“Decreto Crescita-bis”) converted with amendments into Law no. 221 of 17 December 2012, introduced into our legislation provisions regulating the formation and development of “innovative start-up companies”, with a view to promoting sustainable growth, technological development, new business ideas and employment, furthering social mobility and attracting foreign talents, innovative enterprises and capital to Italy.
According to the Law innovative start-up companies may be incorporated in the form of società per azioni (joint-stock company), società a responsabilità limitata (limited liability company), società in accomandita per azioni (limited partnership), società cooperativa (cooperative company) and Italian-resident Societas Europaea. Ministerial Decree 30 June 2014 includes non-resident companies among innovative start-up companies provided that they are resident in EU or EEA Member States, carry out a business through a PE and satisfy the conditions required for resident companies.

Innovative start-up companies must meet the following specific requirements some of which must be satisfied simultaneously while other are mutually exclusive:

• their exclusive or prevalent corporate objects must be “the development, manufacture and distribution of innovative products or services with high technological value”;
• starting from the second year of business, their total annual revenue per the latest financial statements approved within 6 months from the year-end must not exceed 5 million Euro;
• must not have distributed profits since their incorporation year nor must they distribute any while the beneficial regime is in place;
• their principal place of business (PoEM) and centre of main interests must be in Italy;
• must not be incorporated as a result of a demerger or merger or sale of business or division (note that the Ministerial Circular no. 16/E specified that innovative start-up company status is not denied as a result of business transformations and that any business combinations implemented by innovative start-up companies immediately after their incorporation will be evaluated by the tax authorities to ensure that they were not put into place solely to circumvent such prohibition.

In addition, in order to be included among innovative start-up companies, a company must also satisfy one of these mutually exclusive conditions:

• R&D costs must be not less than 15% of the difference between costs and total revenue; or
• 1/3 or more of the staff must be “personnel with a Ph.D. or studying for a Ph.D. at an Italian or foreign University or with a university degree and certified three-year research experience at public or private research institutions”, or 2/3 or more of the staff have a Master’s Degree;
• The company must be the “owner (..) or licensee of at least one industrial property right in relation to an industrial or biotechnology invention or the owner of the rights in a software registered with the special public software registry. Such property rights must directly relate to the company’s corporate objects and business”.

The tax authorities have highlighted the importance of the tax incentives which include inter alia:

• the non-application to innovative start-up companies of convenience companies legislation and the exemption from stamp duty tax and administrative fees for registration with the Companies Registry (article 26);
• the tax and social security exemption of the employment income deriving from the award of financial instruments issued by innovative start-up companies and approved business incubators to directors, employees and quasi-employees (article 27);
• the application to innovative start-up companies and approved business incubators of the incentive to the hiring of highly skilled personnel (article 27-bis);
• tax allowances or tax credits for investors in the capital of innovative start-up companies (article 29).

Article 29 of Decree Law no. 179/2012 introduced also a tax incentive for entities which directly or indirectly (through collective investment undertakings or other companies) invest in the capital of innovative start-up companies, consisting in a reduction of the income tax liability as a percentage of the investment made. Specifically, IRES taxable persons are eligible for a deduction corresponding to 20% of the investment, which must in any case be lower than €1,800,000 in any fiscal year and be held for no less than 2 years (the monitoring period). The Italian Revenue Office clarified that since the maximum qualifying investment is €1,800,000, the IRES taxable person will be entitled to a maximum deduction of €360,000 (20%@1,800,000). The Implementation Decree furthermore provides that if the aggregate income is not sufficient to take advantage of the available deduction, the amount remained unused may be carried over to the next 3 fiscal years up to the corresponding amount.

The incentive applies for IRPEF (personal income tax) and IRES (corporation tax), but not for IRAP (regional production tax).

With respect to non-resident innovative start-up companies with a permanent establishment in Italy, it has been provided that “the incentives are granted in proportion to the increases in the permanent establishment’s capital funds”.

The Implementation Decree specified that with a view to benefiting from the incentive, investors or intermediaries must receive and keep:

• a certificate issued by the innovative start-up company specifying the amount of qualifying investment and the related incentive and attesting that the aggregate cash contribution received in each fiscal year does not exceed 2.5 million Euro;
• a copy of the Business Plan of the innovative start-up company, containing detailed information on the activity carried out by the innovative start-up company with regard to the relevant products and the current or expected trend of sales and profits;
• a certificate produced by the innovative start-up company attesting to the business carried on (for innovative start-up companies with social vocation).

Article 27 of Decree Law no. 179/2012 introduced a number of tax and social security incentives for financial instruments aimed at remunerating highly-skilled work and consulting activities. The financial instruments qualifying for the incentive are “profit-participating” instruments, similar to shares whose yield depends on the issuer’s profits.

As clarified by the tax authorities in Circular no. 16/E, the rule provides that income paid in the form of financial instruments by innovative start-up companies or approved business incubators to their directors, employees and quasi-employees, or income deriving from the exercise of option rights on financial instruments by such persons is not relevant for income taxes and social security contributions. The provision applies as of 19 December 2012, date of entry into force of the law converting Decree Law no. 179/2012.

The beneficiaries of the relief are:

• the directors of the innovative start-up company, unless the office of director falls within the scope of the their profession in which case income will be treated as self-employment income;
• workers under a fixed-term or indefinite-term employment relationship with the innovative start-up companies or approved business incubator;
• quasi-employees, i.e. employees whose income is normally treated as income equivalent to employment income for tax purposes, except providers of works and services.

The rule provides that the incentive for innovative start-up innovative lapses in particular circumstances. i.e the sale, including partial sale, of the shareholdings received in exchange for the investment qualifying for the tax credit, or in case of the withdrawal or exclusion of investors who make direct investments in innovative start-up companies.

Written by Massimo Di Terlizzi – Pirola Pennuto Zei & Associati