Roche & Cie

Tax reduction for investments within SME : stiffening of the measures on 1st January 2016

23 Dec 2015

 The National Assembly has definitively adopted the bill on December 17. Pending its entry into force by Decree, here are the main points of the new measures. Certain elements are for now particularly opaque and complex and deserve a deeper analysis when the implementing conditions will be published.

Originally, the scheme allows reducing the wealth tax by 50% of the amounts paid with a limit of 45.000 euros (or 18.000 in case of investments through a fund). The bill foresees a restriction concerning the eligible subscriptions and a reorientation in direction of the companies in the development stage.

Practically, the investors could still deduct from their wealth tax 50% of their investment in the non-listed SME. However, the field of eligible companies will be limited.

The amended mechanism would be applied to the subscription made from the 1st January 2016.

The eligible subscription would be restrained

The subscription to the initial capital of companies (directly or through funds), notably the cash subscription, would still give right to a wealth tax reduction. However, the contribution of property in kind would be now excluded.

Otherwise, the cash subscription realized in the case of a capital increase would no longer be eligible when the taxpayer would be partner or shareholder in the beneficiary company.

Nevertheless, this type of subscription would stay possible in case of follow-up investments realized with the following cumulative conditions:

·  the taxpayer benefited from a wealth tax reduction for his first investment to the capital of the company ;

·  some follow-up investments was expected in the business plan of the beneficiary company ;

·  the beneficiary company did not become related to an other company.

In other words, the managers could no longer (with some exceptions) reduce their wealth tax investing in their own company.

The new regulation should concern the follow-up investments linked to initial capital subscriptions realized from the 1st January 2016.

The new measures would be focused on the companies in development phase

In fact, the mechanism would be practical for the SME established less than 7 years. This period would be extended to 10 years in case of investment through a French innovation fund (FCPI).

The company which benefited from the provisions should meet at least one of the following conditions at the moment of the initial investment:

·  the company is not active on any market ;

·  the company’s activity has been practiced since less than 7 years , after the first business sale. The turnover threshold which characterizes the first sell will be set by Decree ;

·  the company needs an investment in favor of the risk financing (based on a business plan set to integrate a new relevant geographic or goods market) which is superior to 50% of his annual average turnover of the last 5 years.

All the conditions related to the company would be kept:

Besides the new condition relative to the company “age”, the company should, as it does currently:

·  exercise an industrial, commercial, handmade, agricultural, self-employed activity, except the activity of real estate property management, financial activity and the activity providing guaranteed incomes due to the existence of regulated tariffs ;

·  meet the Community definition of the SME ;

·  have his headquarters in a EU member State, in Island, Norway or in Lichtenstein ;

·  be subject to the corporate income tax ;

·  count at least two employees at the termination of the financial year which follows the subscription or one employee if the company is subject to the obligation to register at the Chamber or trade and craft.

Besides, the shares couldn’t be allowed to trading on the regulated market or on a multilateral trading facilities (French or foreign).

Finally, the subscription to the initial capital should always award to the subscriber only the rights related to the shareholder or partner status, excluding all the counterparts especially in the form of preferential tariffs or a priority access to the goods produced or services performed by the company or guaranteed in capital.

It would be expressly foreseen that the conditions relative to the nature of the activity practiced, to the assets incorporation, to the localization of the headquarter and to the lack of counterpart, must be respected at the date of subscription until the 31 December of the fifth year following this subscription.

If not, the tax reduction should be reconsidered.

Otherwise, two new conditions would be introduced:

– the company couldn’t be considered as a struggling company in the sense of  the EU Commission Regulation of 17 June 2014 ;

– the whole of provisions received as subscription and the helps to finance the risks couldn’t  exceed 15 million euros.

New exceptions would be set up

The benefice of the reduction would always be subject to the conservation of shares provided in counterpart of the investment until the 31 December of the fifth year following the one of the subscription.  The sale of shares before the term of this period would continue to lead to the questioning of the advantage (with some exceptions).

On this point, new exceptions would be introduced and they would formalize the solutions already taken on by the administration (death or invalidity of the subscriber or his spouse, under certain conditions, the shares donation or dismissal).

The “holding-wealth tax” scheme would be modified as a consequence

When the subscriptions are made to the capital of holding, they should fill all the conditions practicable to the operational SME, (except the conditions of activity and the limit concerning the number of employees) but also the new conditions concerning the age of the company and the total amount of the provisions.

Besides, the company shouldn’t be a partner or a shareholder of the company in which the company invests again except in case of follow-up investment (exception of the new measures). In this way, a partner or a shareholder director could no longer beneficiate from the mechanism.

If you want to benefit from the measures running until the end of 2015, don’t hesitate to contact us.

Cabinet Roche & Cie, Chartered Accountant in Lyon, France.