Tax shelter startup and fiscal exemption for loans to starting enterprises via crowdlending
To encourage investments in SME’s and startups, the programme act of 10 August 2015 introduced a tax break for investments made in starting enterprises, better known as the “startup tax shelter”, as well as a tax exemption for interests on loans made to starting enterprises via a crowdfunding platform.
The tax shelter for startups consists of granting a tax break to an investor (natural person) who invests directly or through a crowdfunding platform in an SME or a startup of up to 30 or 45% of the investment made in the SME or startup.
1. Tax shelter startups: fiscal benefit and investment in starting enterprises
In order to benefit from this tax advantage, the investment must a priori be made when the company is incorporated or when there is an increase in capital/equity within four years of its incorporation.
The tax authorities have also clarified that a company is deemed to be incorporated:
- on the date of deposit of the incorporation deed with the clerk’s office of the enterprise court; or
- on the date of the fulfillment of a similar formality in another Member State of the European Economic Area.
If the activity of the starting enterprise consists of the continuation of an activity previously pursued by a natural or legal person, the company is deemed to be incorporated respectively:
- upon the first registration with the Crossroads Bank for Enterprises by this natural person;
- or upon deposit of the deed of incorporation with the clerk’s office of the enterprise court by this other legal person;
- or upon the fulfillment of a similar registration formality in another Member State of the European Economic Area by that natural person or other legal entity.
The legislator has therefore not reserved this tax break for investments in companies active in certain sectors (subject to the conditions listed below and the exclusion of real estate enterprises).
Tax shelter for startups: for what kind of investment ?
The investment must be made in cash; investments in kind or in industry cannot benefit from this tax break.
Furthermore, the investor must receive new shares that must be issued by the company in exchange for his investment, debt instruments or other financial instruments (profit shares, warrants, bonds, etc.) do not qualify for the tax shelter.
Conditions to be fulfilled by the company benefiting from the tax shelter startups
Article 145/26 of the ITC 92 provides a whole series of conditions that must be met by the company receiving the investment in order for the investor to benefit from this tax advantage:
1° the company must be a domestic company or a company whose registered office or place of business is in another Member State of the European Economic Area and which has a Belgian establishment as referred to in article 229 and which was not incorporated before 1 January 2013 ;
2° the company is not incorporated within the framework of a merger or demerger of companies;
3° the company is considered a small company on the basis of article 1:24, § 1 to 6, of the companies and associations Code for the assessment year relating to the taxable period during which the capital/equity increase takes place;
4° the company is not an investment, treasury or financing company;
5° the company is not a company whose statutory principal purpose or main activity is to establish, acquire, manage, renovate, sell or rent real estate for its own account or to hold participations in companies with a similar purpose, nor a company in which immovable property or other real rights in respect of such property are held, of which natural persons exercising a mandate or functions as referred to in article 32, first paragraph, 1°, their spouse or children, where such persons or their spouse or children have the legal enjoyment of the income of the latter, have the use ;
6° the company is not a company incorporated for the purpose of concluding management or directors’ agreements or which derives its main source of income from management or directors’ agreements;
7° the company is not listed on the stock exchange;
8° the company has not yet (i) made any reductions in the capital/equity, except for reductions to make up for incurred losses or to create a reserve to cover a foreseeable loss, or (ii) paid out dividends;
9° the company is not the subject of collective insolvency proceedings or is not in the conditions for collective insolvency proceedings;
10° the company does not use the sums received to distribute dividends or to purchase shares or participations or to grant loans;
11° the company, after payment of the sums referred to in §1, first paragraph, a and b, by the taxpayer or the investment vehicle, or of the investment referred to in §2, third paragraph, 1°, by a public starters fund or private starters alternative collective investment fund with a fixed number of shares, shall not have received more than EUR 250.000 pursuant to the application of this article.
These conditions must be respected by the company for an investment that benefits from the tax shelter. However, the conditions 4°, 5°, 6° and 10° must also be respected by the company during the 48 months following the paying-up of the shares of the company.
The amount of investments benefiting from this tax break for a qualifying company may therefore not exceed EUR 250.000 and this during the entire lifetime of the company.
The company must also be considered a small company as defined in article 1:24 of the companies and associations Code. Thus, it must be a company with a legal personality which, on the balance sheet date of the last closed financial year, does not exceed more than one of the following criteria:
- annual average number of employees: 50 ;
- annual turnover, excluding VAT : 9.000.000 euro ;
- balance sheet total: 4.500.000 euro.
Companies that start their activities must estimate these criteria in good faith at the beginning of the financial year. If this assessment shows that more than one of the criteria will be exceeded in the first financial year, this must be taken into account in the first financial year. This means that if, in the light of the financial plan, it appears that the thresholds will be exceeded from the start, the company cannot be considered small.
Tax shelter startups: what are the conditions to the investor must fulfil?
In order to benefit from this reduction, the investor must be a natural person subject to personal income tax or non-resident tax in Belgium.
This measure is therefore not intended for investments of one company in another.
A manager of an enterprise (directors, liquidators, similar positions, independent directors, etc.) will not be able to benefit from this measure for the investments he makes within his own company.
However, if he decides to invest in another company in which he does not hold a managerial position, he will be able to benefit from this tax reduction for this investment.
However, the tax authorities have accepted that an company manager can still benefit from the tax break provided that:
(i) his or her appointment is not provided for in the deed of contribution; and
(ii) he or she is not remunerated.
The investment made by the investor benefiting from the tax break may not represent more than 30% of the company’s shareholder structure.
Also, the investor will have to maintain its participation in the company for a period of 48 months from the date of the investment in the company.
If this is not the case, the obtained tax benefit will be reduced by the remaining period to reach the 48-month waiting period.
What is the tax benefit that is granted by the tax shelter startup?
In exchange for his investment, the natural person is granted a tax reduction equal to 30% of the amount invested in the starting enterprise.
However, this amount is limited to EUR 100,000 per taxable period and per taxpayer.
The investment does not necessarily have to be made in a single company, the investor can invest in several companies and benefit from this measure as long as the amount of his investments benefiting from this tax reduction does not exceed 100.000 euros per taxable period.
This tax reduction can be increased to 45% of the invested amount if the company in which the investor decides to invest is considered a micro-company. In order to be considered a micro-company, the company must not exceed more than one of the following limits during the last closed financial year:
- balance sheet total not exceeding EUR 350.000 ;
- annual turnover, excluding VAT, is not higher than 700.000 euro ;
- annual average number of employees is not higher than 10.
Finally, this tax reduction obtained by the investor cannot be repaid or carried forward to a later taxable period if it cannot be fully offset due to the investor’s lack of sufficient taxes.
Two founders decide to incorporate a company together. After a year, they decide to raise money to develop their company. A private investor is interested and decides to invest EUR 100.000 in the company. He is however not appointed as a director of this company. At the time of this investment, the company is considered a micro-company. Therefore, the investor receives a tax reduction of 45.000 euros.
If, for the taxable period in which the investor makes this investment, he has to pay a tax amount of 40.000 euros, the amount of the tax reduction obtained for this investment is reduced accordingly. The 5.000 euros not taken into account cannot be carried over to the next taxable period and will not be refunded to the investor by the government.
One year after this investment, the company realizes a second fundraising from new private investors for an amount of 200.000 Euros.
These new private investors will only be able to benefit from the tax shelter on their investments up to an amount of EUR 150.000, given that the company will only be able to benefit from this tax shelter for a total amount of EUR 250.000 of investments, and this for the entire lifetime of the company.
2. Tax exemption for interests on loans to starting enterprises via a crowfunding platform
The programme act of 10 August 2015 introduced another measure to favor starting enterprises in addition to the “tax shelter for startups”: the exemption from withholding tax on the interests of loans to starting enterprises through a crowdfunding platform.
Starting Enterprises: conditions for the exemption from withholding tax on loans granted via crowfunding platforms
The conditions for benefiting from this measure are laid down in article 21, 13° of the ITC 92:
- the loan must be granted by a natural person (not a company);
- the loan must be granted to a starting enterprise. For this criterion, we refer to the explanation given above for the tax shelter for startups;
- the loan must be granted to a small company within the meaning of article 1:24 of the Belgian companies and associations Code. Again, we refer to the explanation above regarding the tax shelter for startups. Note, however, that the legislator did not make a distinction between a small company and a micro-company for this tax exemption;
- the loan is concluded on the basis of the granting of an annual interest for a period of at least four years;
- the loan is granted with the intervention of a crowdfunding platform approved by the FSMA or by an equivalent authority of another member state of the European Economic Area;
- the loan may not be taken out for the purpose of refinancing another loan.
Starting enterprises: activities and purpose of the financing
In contrast to the tax shelter for startups, no (restrictive) conditions are set for the activities the borrower may perform.
It is only specified that the loans granted must be used to finance new economic initiatives. The explanatory memorandum gives no indication or any example of what is meant by such “new economic initiatives”. One may assume that it is up to the crowdfunding platform to make a selection in this respect.
Company managers can benefit from the exemption from withholding tax on the interests of loans granted to their own starting enterprises through a crowfunding platform
In contrast to the tax shelter for startups, company managers are not excluded from this exemption.
Company managers can therefore lend money to their company and benefit from the tax exemption for interests (provided that all the above conditions are met).
This is expressly confirmed by the explanatory memorandum of the law: “The natural persons who can obtain the exemption … are those who can be considered as independent private investors, including entrepreneurs and company managers acting as private persons”.
If these conditions are met, the borrower benefits from a fiscal advantage in the form of an exemption from withholding tax on the interest of the first 15.860 euros (amount indexed for the 2021 tax year) lent per year, and this for four years. Only the interest for the first four years can therefore benefit from the exemption.
About the authors: Thomas Daenen and Clément Pirenne
Thomas Daenen is partner in the law firm Beyond . Clément Pirenne is lawyer in the law firm Beyond. They specialize in corporate law and business law. Clément Pirenne has an additional master’s degree in fiscal law and specializes in this field. Beyond has developed extensive experience in advising, supporting and defending startups and scaleups, particularly in the area of fundraising, but also in the areas of intellectual property, privacy and business law.