Supporting startups with a wealth tax break

Jun 3, 2014
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luxury_taxI’ve been known to jokingly refer to this time of year the “easy money period” for startups in France. The reason for this is that late May and ultimately June 15 represent the filing deadlines for wealth tax in France.

The French wealth tax, l’impôt de solidarité sur la fortune, or ISF for short, represents a progressive tax on households whose wealth exceeds a threshhold of 1.3m€ worth of net assets. Currently, assets exceeding 800k€ are taxed incrementally at 0.5 ~ 1.5%.

Thanks largely to the enactment in 2007 of the Loi TEPA — a law offering a basket of fiscal incentives intended to stimulate employment and purchasing power — French ISF taxpayers can receive a significant tax break by investing in eligible ISF investment vehicles, such as certain retail VC funds (FCPI) or managed products called mandats de gestion. I’ve opined in the past about the pros and cons of such vehicles for the investor, for the startup, and for innovation in general. The bottom line is that there are several subtle ramifications of such investment vehicles, so I won’t rehash what I’ve already written.

Beyond investing via an ISF investment vehicle, I’m often asked if there are other ways to reap the generous ISF tax breaks while supporting tech startups. The answer is: yes, by investing in the startups directly, rather than indirectly via an ISF fund.

As per current fiscal legislation, French taxpayers liable for ISF can obtain a 50% immediate credit by investing directly in a startup, provided that the startup qualifies as an SME, reflecting for example the following criteria:

  • fewer than 250 employees
  • less the 50m€ revenue
  • no single organizational shareholder owning more than 25%
  • headquarters based inside the EU (although being outside France elicits greater scrutiny)

For taxpayers seeking their ISF reduction, here’s a summary of the key differences between investing directly vs. an ISF fund or mandat de gestion:

isf_fund_vs_direct

For avoidance of doubt, this is not an investment solicitation nor a recommendation of one method over another, but rather an informal explanation of how the system works. Furthermore, my explanation is not comprehensive, and probably not even perfectly accurate, as the law is complex and dynamic. Readers of this piece must do their own homework, and if relevant, seek the advice of a qualified expert.

The lesson of all this for tech startups in France is to be aware of your eligibility for ISF tax deductions. Whether or not you want to raise money from an individual directly, from an ISF fund, or from an independent institutional VC for that matter, knowing the objectives and constraints of potential investors makes fundamental sense.