Crowdfunding tax incentives in Europe: a comparative analysis

ABSTRACT

Some European countries offer tax incentive schemes to investors and companies in crowdfunding. On one hand, they could be seen as a tool to reduce the system’s dependence on banks and increase the availability of credit for start-ups and Small and Medium Enterprises (SMEs). On the other hand, there is the counterweight of disadvantages that investors may face by investing in crowdfunding (i.e. complex and incomplete laws, and weak protection). This paper is primarily intended as a primer on the use of tax incentives for crowdfunding in Europe. In this study, we first examine the implementation of tax incentive schemes in the United Kingdom, France, Italy, Spain, and Belgium. Then, we analyse and compare the characteristics of such schemes along three dimensions: the incentives structure; the business characteristics; and the type of investor. We find that tax incentive schemes for crowdfunding vary widely in their form and other features of their design. Moreover, the most used forms of tax incentives are those that provide for an up-front tax credit on the amount invested in early-stage ventures. These incentives have an immediate effect on the annual income tax of the investor. A central implication is that the more tax incentive schemes are properly designed and tailored for crowdfunders, the more investors, start-ups and other firms with low liquidity could use crowdfunding as a source of funding.

KEYWORDS:

• Government Policy and Regulation
• Tax incentives
• Crowdfunding investment
• Entrepreneurial finance
• European countries

JEL classifications:

• G30
• H31
• H32

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Source: www.beauhurst.com.

2. Source: Crowdfunding in Italy, Report by Starteed. Available at: https://www.crowdfundingreport.it.

3. Government of the United Kingdom (UK Government website) (2016).

4. All companies owned or controlled by the company receiving investment under EIS scheme have to be ‘Qualifying subsidiary companies’. This means that company must own more than 50% of the subsidiary’s shares and no one other than company or one of its other qualifying subsidiaries can control this qualifying subsidiary company.

5. Qualifying business activity means an existing qualifying trade or which must start within two years of the investment; a research and development activity that’s expected to lead to a qualifying trade.

6. Government of the United Kingdom (UK Government website) (2017).

7. New qualifying trade means a trade that must not have been carried out for more than two years by the company or any other person who then transferred it to the company. Moreover, the company, or any qualifying subsidiary, must not have carried on any other trade before started the new trade.

8. The government provides Junior ISAs for UK resident children under the age of 18 who do not have a Child Trust Fund account. Junior ISAs are tax advantaged and have many features in common with ISAs. The annual subscription limit for Junior ISAs for 2017/18 is of £4;128.

9. See Innovative Finance ISA (2017).

10. Government of the United Kingdom (UK Government website) (2018).

11. See the Law Madelin n° 94–126 du 11 février 1994 relative à l'initiative et à l'entreprise individuelle, Law n° 2007–1223 du 21 août 2007 en faveur du travail, de l'emploi et du pouvoir d'achat also known as Law ‘TEPA’ and Law n° 2017–1837 du 30 décembre 2017 de finances pour 2018.

12. Décret d'application du PEA-PME en date du 4 mars 2014; Règlement (CE) N. 800/2008 de la commission du 6 Août 2008; Communiqué de presse du Ministère de l'Economie et des Finances N°1169.

13. See Article 29, sub-paragraph 1, 2, 3, 4 e 5, of Law Decree no. 179 dated 18 October 2012 and subsequent amendments.

14. See the new letter d-bis) inserted in the Article 44, sub-paragraph 1, of the Consolidated Income Tax Act (TUIR).

15. Sociosinversores. ‘¿Tengo deducciones fiscales por inverter en el capital de Empresas?’ Available at: https://www.sociosinversores.com/paginas/faq.

16. Companies must also have an equity capital lower than €400,000 and must be constituted with the legal status of S.A. (Sciedad Anonima), S.L. (Sociedad Limitada), S.A.L. (Sociedad Anonima Laboral), and S.R.L.L (Sociedad de Responsabilidad Limitada Laboral).

17. Ramón Pérez Lucena - Abogado de Fundaciones (2018).

18. Source : Bolero Crowdfunding. Available at: https://bolero-crowdfunding.be/fr/faq?page=1.

19. Before the entry into force of the Belgian Crowdfunding Law on 1 February 2017 (applied retroactively as from 1 July 2016), crowdfunding platforms were not legally recognised in Belgium and tax benefits were available only for direct investment in start-ups. Now, tax benefits also apply for investment in start-ups through licensed crowdfunding platforms.

20. Recognised entities include small, large, and very large non-profit associations.