Start-Up Tax Shelter : is equity crowdfunding filling a gap?
23 April 2017
by Ana Maria Franken
Modification of Tax Shelter Regime
We again welcome the tax shelter for start-ups! As of January 24, 2017 the Royal Decree of January 12, 2017 regulates crowdfunding platforms (such as MyMicroInvest and KBC Bolero Crowdfunding) and imposes the duty to apply for an FSMA license to become fully operational.
The Program Act of August 10, 2015, which also regulates tax shelters for start-ups, is thus now also equally applicable to investments through crowdfunding platforms. Previously, the tax shelter only applied to direct investments.
The need for an extension of the Tax Shelter Regime to crowdfunding
To entice investors to participate to crowdfunding and allow the companies access to the savings of the general public in a simple and quick manner, while safeguarding investor protection, the new Crowdfunding Act of December 18, 2016 (on the status and control of alternative financing platforms and the provision of alternative financing services by regulated companies) and the Royal Decree of January 12, 2017 created the legal framework for regulated online platforms.
In 2016 almost 30 million euros was raised in Belgium through crowdfunding initiatives. An increase of almost 200% compared to the previous year. However, Belgium is still lagging behind its neighbouring countries. But it has the potential to catch up. The new legal framework allows a collective equity investment in a company through a crowdfunding platform with a tax deduction for each of the investors, making crowdfunding in Belgium considerably more favorable to investors. This funding technique is attractive and vital for Belgian creative talent, as well as for young and promising start-up entrepreneurs for whom external financing was not easily accessible before. Crowdfunding allows start-ups to raise limited funding needed at an early stage, while at the same time connecting with the public and reaching retail investors.
Conditions of the Tax Shelter Regime
The investment through a crowdfunding platform is subject to the Tax Shelter Regime under the following conditions:
- The Start-Up Tax Shelter is open to every Belgian tax resident;
- The tax reduction amounts to 30% of the investment in a micro-company or 45% of the investment in an SME, provided the companies are registered in Belgium and the capital increase takes place within 4 years following incorporation.
- Any Belgian investor can invest up to € 100,000 per year under the tax shelter programme by means of a cash investment in exchange for up to 30% of the target's share capital (on a non-diluted basis). The investor has to explicitly confirm the tax deduction annually for each of the 4 subsequent years from the date of the investment. For this purpose, the relevant company provides an annual tax attestation (certificate). In the event of an early sale of the relevant shares, the investor must repay the corresponding portion of the previously received tax deduction. Consequently, an investor wanting to benefit from the full tax shelter is obliged to hold the acquired shares for at least 4 years.
- Whenever a crowdfunding campaign is initiated, the crowdfunding platform will only formalise the capital increase at the notary public when the stated minimum funding level has been reached. If the campaign does not reach the minimum funding level, the capital is returned to the investors. Following the capital increase, crowd investors will be treated as one grouped set of shareholders with grouped voting rights (if any).
... and with respect to the following limitations :
- Companies having previously raised up to € 250,000 under the tax shelter programme, as well as management companies, real estate, investment or financing companies are not eligible for this tax benefit.
- The investments raised through the tax shelter cannot be used for the distribution of dividends, acquisition of shares or the granting of loans, as the purpose of the investment should be to stimulate entrepreneurial growth.
- Furthermore, it should be noted that founders are not allowed to invest in their own company and benefit from the tax deductions. This prohibition also applies to the Board members of the relevant company.
- Finally, to benefit from this capital increase through a crowdfunding platform, the relevant company is not allowed to have carried out a capital decrease prior to this investment.
Start-ups will definitely benefit from this broader scope of the Tax Shelter, but the non-professional Belgian investor should always bear in mind that equity crowdfunding is still a high risk investment.
Also, it should always be considered whether it is advisable for young companies to get crowdfunding, as the addition of numerous small shareholders to the share capital creates additional complexity.
For further questions or comments, please contact Ana Maria Franken.