Business angels and tax facilities in Romania, EU and the United States

At the middle of the month July 2015, the Law 120/2015 has come into effect regarding the encouragement of business angel investments.

As a result, this concept is regulated in Romania as well, and this means that natural persons obtaining shares by investments in microenterprises and small and medium-sized enterprises can benefit from other tax facilities in their capacity as business angels, such as:

  • Exemption of tax on dividend income obtained for a term longer than three years from the receipt of shares. Exemption is granted up to the equivalent of the amount invested.
  • The exemption of tax from gains obtained as a result of share ownership transfer, after a term of at least three years since it is obtained.

The total value of granted facilities cannot exceed the value of the investment made.

As expected, there are certain conditions that are to be fulfilled in order to apply such tax facilities:

  • The amount invested has to range between EUR 3,000 and 200,000 and it has to be invested strictly for the purpose of fulfilling the main business line of the investment. The business line must not be consulting in any field, gambling or betting, insurances or real estate transactions.
  • Contributions in kind to the registered capital shall be made by issuing new registered shares with share premium. The first one cannot be used for increasing the registered capital or the distribution to shareholders earlier than three years from investment date.
  • The investor cannot own more than 49% of the registered capital of the company where the investment took place.
  • In case several natural persons act jointly as individual investors or business angels, tax facilities can be granted for a maximum of 49% of the capital of the company where the investment was made.
  • The company does not have any liabilities to the state budget as at the date the registered shares are assigned to the individual investor.

At a European level, the body governing the business angel concept is EBAN (European Trade Association for Business Angels, Seed Funds and other Early Stage Market Players).

In 2012, EBAN carried out a study summarizing tax facilities offered by 32 European states to individual investors (business angels).

Tax incentives that are available specifically for risk capital, private capital and start-up angels can be found in eight countries: Belgium, France, Ireland, Italy, Germany, Luxembourg, Portugal and Great Britain, where this kind of investment seems to receive more attention from the Government. Such incentives include governmental guarantees, decreases of tax rates or tax credits. It is notable that where such tax incentives become manifest, interesting volumes of business angel activities appear.

Nevertheless, there are only few states that offer special conditions for investments in early business stages and there are only three of them that offer complex schemes including tax incentives for business angels:

France

Business angels benefit from a tax reduction of 18% of the amount invested, within a limit of EUR 50,000 (EUR 100,000 if they form a couple). The investment has to be held for at least 5 years and the company has to be a small or medium-sized enterprise.

Moreover, natural persons who are subject to wealth tax can invest up to EUR 45,000, which shall bring them 50% reduction from their wealth tax. Such tax relief is applicable in case investments are made in small and medium-sized enterprises from any of the 27 EU member states, which is an exception.

Italy

Capital gains of business angels cannot avoid taxation, regardless of whether such investors are established in Italy or not. The prerequisite for this is that tax-exempted business angels must not be involved in a business where shares are actually related, if:

  1. The participations that have been assigned have been held for three years before their assignment;
  2. The company where shares are assigned are incorporated with no more than 7 years in advance;
  3. Capital gains are invested in the acquisition of shares in companies that are not incorporated with more than three years in advance, under the condition that they should be involved in the same line of business as the one of the company from which shares have been assigned.

Great Britain

Great Britain benefits from several schemes:

  • Exemption of entrepreneurs: this is focused mainly on entrepreneurs and it provides a 10% tax rate for the first 10 million GBP from the total of the qualified commercial assets, unlike other tax rates that reach even 28%.
  • The income tax exemption according to the British Enterprise Investment Scheme (EIS) was increased recently, in order to allow alignment with risk capital funds, which caused the initial tax exemption to increase from 20% to 30%. The amount of investment that can bring an initial tax exemption is 1 million GBP, which implies a limitation to the payment of income tax in case of amounts smaller than that.
  • Exemption with a deferral of tax on capital gains: capital gains from any type of assets can be postponed if revenues are invested in the shares of a company that qualifies for EIS. Deferrals apply until participations are transferred according to EIS or another taxable operation takes place.

As regards the United States of America, the taxation system here is very complex.

When considering financial incentives, the tax payer can implement promising practices of mobilisation of local investments, such as tax credits, loans under certain conditions or subventions in equal proportion to investments of business angels.

The most common yet the most controversial incentive is personal tax credit. More than eighteen states offer tax credits for investments in early stages, with rates of 10% up to 100%, of which several have recently come into effect. Such programs vary a lot depending on the state and they cover a large variety of details. Kentucky is currently trying a different model, by their Investment Fund Act, where professionals receive tax credits of 40% as individuals or corporations, if they manage funds of over USD 500,000, which are invested in companies that qualify for the scheme. Michigan has implemented a Business Angel Incentive, which allows for a deduction of income tax for natural persons, if such persons reinvest in qualified companies.

The most important aspect of tax credit is its credit rate. States with credit rates of 10% did not seem to enjoy significant investment increases: in Vermont a 10% credit was established in 2004 for investments and then no tax credit was applied for. In Hawaii, only USD 162.000 were required by 23 tax payers in the first year of credit. In 2002, applications for tax credit rose in Hawaii to a value exceeding 26 million USD, after the state increased the rate from 10% to 100%. Incentive schemes can also be conceived in such a way that credits apportioned for the next year can be used for the current year if those that were designed as current have run out, as it happened in Wisconsin, where credits were levelled to a limit of 3 million USD per year.

As a result, international practice regarding the status of business angels, as well as tax facilities granted to them is very different. This is why international practice regarding the status of business angels, as well as tax facilities granted to them is very different. The most important issue would be an analysis on tax systems from each state and an attempt on implementation of such facilities that would bring benefits to the national economy in the long run, by encouraging investments.

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