24 September 2020
Since about 5 years ago, individuals have the opportunity to invest in the shares of small and medium-sized enterprises (“SME”) that qualify as start-ups or scale-ups. The individual may thus be eligible for a tax credit for personal tax purposes. The current tax shelter tax rules have now been temporarily extended to SME’s in distress because of the corona crisis. How does it work?
This new tax shelter regime is a temporary measure applicable to the acquisition of shares on the occasion of a capital increase in cash between 14 March 2020 – 31 December 2020. The contribution should be fully paid-up by 31 December 2020. The date of incorporation of the SME involved is irrelevant. However, the investment should be made into the share capital of a SME whose turnover has decreased by at least 30% during the period 14 March 2020 – 30 April 2020 compared to the same period in 2019. If the SME has only been incorporated after 14 March 2020, then the turnover figure of the period 14 March 2020 – 30 April 2020 will be compared with the estimated turnover for the same period as laid down in the company’s financial plan.
The tax shelter regime comes down to a 20% tax credit for personal tax purposes applied to the amount of the qualifying investment.
Only direct investments made by natural persons qualify. The temporary tax shelter regime has been extended to company Directors who (if conditions are satisfied) would also be eligible for the standard tax shelter regime.
Since the purpose of this temporary tax shelter is to provide financial support to companies in distress, a capital increase which is (in)directly financed by cash that was first taken out of the company does not qualify. This is e.g. the case for capital increases which are financed by a loan of the company or thanks to the reimbursement by SME of a current-account debt. The same goes for companies having a direct shareholding in a company based in a tax haven country or who make certain payments to tax haven beneficiaries, unless the SME can demonstrate the economic relevance of its link with such tax haven country. Finally, the SME cannot use the contributed cash for the purpose of distributing a dividend or a liquidation reserve, a redemption of own shares, granting a loan, reducing the share capital or any other reduction of the SME’s net equity.
The SME should comply with these conditions during 60 months. If not, the tax credit claimed by the individual will (partially) forfeit. This is also the case if the individual alienates the SME shares within the same term.
Furthermore, the individual should take into account some maximum amounts above which no personal tax credit can be claimed. For example, the tax credit per individual is limited to a contributed cash amount of maximum 30% of the SME share capital with an absolute ceiling of EUR 100.000. In addition, a SME can only receive cash contributions of EUR 250.000 in total, be it that the latter ceiling can be combined with the maximum amount applicable to the standard permanent tax shelter regime for start-up companies.
In summary: the new COVID-19 tax shelter regime can be an elegant way to increase the share capital of an SME. The same tax benefits apply to a taxpayer who is keen to invest into the share capital of a qualifying SME that has been incorporated more than 10 years ago.