All regulatory news for innovative start-ups and SMEs

With the publication in the Official Gazette of Law No. 193 of 16 December 2024 ‘Annual Market and Competition Law 2023’ (hereinafter ‘Competition Law 2023’), it introduces several new features for innovative start-ups and innovative SMEs, with the aim of facilitating access to financing and offering new tax incentives. The novelties are contained in Articles 28 ff. of the Law under comment, which were almost completely rewritten by the amendment of the rapporteurs approved by the Chamber in its sitting of 27 November 2024 (for example, it should be noted that the much-discussed threshold of share capital provided for in the original text of the bill has been eliminated).

As reiterated by the parliamentary acts of the Chamber of Deputies commenting on the Competition Law 2023, these rules were formulated through discussions with the production world and with the requests received from the main stakeholders of the startup system and seek to implement the objectives set forth in mission 1, component 2, of the NRP, approved by the European Commission on 24 November 2023, which, under M1C2-11, provide for the inclusion, within the framework of the annual law on competition, of rules aimed at reviewing and updating the legislation on start-ups in order to rationalise the existing discipline, revising the definition of start-ups and promoting investments in risk capital by private and institutional investors.

The aim of this legislation is to strengthen support for private investors and to encourage the inflow of capital into strategic sectors with high technological potential. While recognising the positive impact of the measures introduced, there are structural criticalities that risk undermining their overall effectiveness. While on the one hand we have the willingness to increase incentives to start-ups and also recognise that they have reached a stage of maturity where they are ready for significant growth and large-scale expansion (scaleup phase), on the other hand, new requirements and limitations are imposed, aimed at ensuring that only start-ups that prove to be truly innovative and potentially capable of making a significant impact on the economy and innovation can benefit from these instruments.

In this article by Massimo Marchini, WST Law & Tax Firm comments on the main changes and the insights they may generate, giving a central focus to the legislation that has come into force.

Definition of innovative start-ups (Art. 28 of the Competition Law)

Article 28 of the Competition Law 2023, intervenes on the notion of innovative start-up dictated by Article 25 of the so-called Start-up Act. Start-up Act (i.e., Decree-Law No. 179 of 18/10/2012). In particular, Paragraph 1 of the Competition Law adds further requirements qualifying the concept of innovative startup, such as the requirement that the innovative startup must be a micro, small or medium-sized enterprise (MPMI) and specifying, within the requirement of the exclusive or prevalent corporate purpose being the development of innovative products or services with a high technological value, that it must not carry out prevalent agency and consulting activities.

Paragraph 2, on the other hand, introduces specific requirements aimed at proving the dynamism and evolution of the enterprise. In particular, for the purposes of the innovative startup’s permanence in the special section of the companies’ register referred to in Article 2188 of the Civil Code, after the conclusion of the third year, this can be extended to a maximum of five if the company meets at least one of these requirements (a) increase to 25 per cent of the percentage of research and development expenses, as defined in paragraph 2, letter h, number 1); (b) stipulation of at least one experimentation contract with a public administration; (c) registration of an increase in revenues from the company’s core business operations or in any case identified under item A1) of the profit and loss account, as referred to in Article 2425 of the Civil Code, or employment, of more than 50 per cent from the second to the third year; (d) establishment of an equity reserve of more than 50. 000, by obtaining a convertible loan or a capital increase at a premium leading to a shareholding not exceeding the minority shareholding by a professional third-party investor, a certified incubator or accelerator, a supervised investor, a business angel or through equity crowdfunding carried out through an authorised platform, and an increase to 20 per cent of the percentage of research and development expenses, as defined in paragraph 2, letter h), number 1); e) obtaining at least one patent.

In addition, this term may be further extended for a further two years and up to a maximum of four, for the transition to the scale-up phase and in the presence of specific requirements, essentially attributable to the company’s development, which are: i) a capital increase at a premium by an OICR, in an amount exceeding EUR 1 million, for each extension period; ii) an increase in revenues from the company’s core business or in any case identified under item A1 of the profit and loss account, as per Article 2425 of the Civil Code, in excess of 100% per annum.

Transitional provisions for already registered start-ups (Article 29 of the Competition Law)

The decree in comment establishes transitional provisions for innovative start-ups already registered in the special section of the Companies Register. In particular, Article 29 establishes that innovative start-ups already registered in the special section of the Companies’ Register on the date of entry into force of the Law are entitled to remain in it beyond the third year provided that they meet the new requirements set forth in subparagraphs (a) to (e) commented on in the preceding paragraph (which refer to Article 25, paragraphs 2 and 3 of the Startup Act):

1. in the case of start-ups registered for more than eighteen months, within twelve months of the expiry of the three-year period;
2. in the case of start-ups registered for less than 18 months, within six months of the aforementioned deadline. In addition, companies that no longer qualify as innovative start-ups may register, if they meet the requirements, in the register of innovative SMEs.

Innovative start-ups that lose the requirements for registration following the entry into force of these rules will still be able to register in the special section of the Companies Register dedicated to innovative SMEs, provided they meet the relevant requirements.

Changes to the definition of certified incubator (Art. 30 of the Competition Law)

In short, the Competition Law 2023 aims to change the definition of certified incubator, adding the activities of setting up or incubating innovative start-ups to those of accelerating and supporting them. It is also envisaged that certified incubators that carry out startup support and acceleration activities will be registered in a special section of the Companies Register other than the one in which innovative startups are registered.

New tax benefits for investors (Art. 31 of the Competition Law)

Article 31 makes further amendments to the Startup Act’s relief rules. Articles 29 and 29-bis of the aforementioned body of law define a series of IRPEF deductions (so-called ordinary IRPEF deduction and de minimis IRPEF deduction). In detail, Article 31 increases the amount of the allowance under Article 29-bis (under the de minimis regime), increasing the deduction percentage from 50 to 65 per cent of the amount invested by the taxpayer in the share capital of one or more innovative start-ups. In relation to the de minimis IRPEF deduction, we recall that Law No. 162/2024 (in force as of 22 November 2024) allows, for investments made starting from the tax period following the one in progress as of 31 December 2023, to transform the non-deductible excess into a tax credit to be used in the tax return or to be offset in the event the taxpayer is unable to make a deduction.

However, the incentives commented on in the preceding sentence do not apply in cases where: i) the investment generates a qualified participation in excess of 25% of the share capital or governance rights; ii) the taxpayer is also a provider of services to the start-up, either directly or through a subsidiary or associate, for a turnover exceeding 25% of the eligible investment.

Furthermore, with reference to the de minimis deduction only (65% deduction) it is provided that (i) it can only be applied with reference to start-ups in the first three years of registration; (ii) it does not cease to apply in cases beyond one’s control (e.g., cases of compulsory disinvestment, such as the activation of forced sale clauses by the majority shareholder vis-à-vis the minority shareholder); (iii) it accrues from the date of the transfer in favour of the start-up in the case of investments in converted financial instruments (and no longer from the date on which the conversion occurs).

A further facilitation is also envisaged for incubators and accelerators that invest, directly or indirectly, in the capital of innovative start-ups (tax credit equal to 8 per cent of the sums invested, up to a maximum investment amount of EUR 500,000/year and with a maintenance obligation for at least three years).

Finally, a deadline of 31 December 2024 is set as the deadline for the 50% deduction of the amount invested by the taxpayer in the share capital of one or more innovative SMEs.

Contribution in the form of tax credit in favour of certified incubators and accelerators (Art. 32 of the Competition Law)

Article 32 continues the objective of incentivising investment in innovative start-ups through the recognition of a contribution, in the form of a tax credit, in favour of entities that support the initial or subsequent development of start-ups (certified incubators and accelerators) that make, directly or through other specialised entities, investments in innovative start-ups.

The benefit is recognised, starting from the 2025 tax year, to the extent of 8% of the amount invested within the maximum limit of €500,000 of annual investment, with the obligation to maintain the same for at least three years. Any transfer, even partial, before the three-year period results in the forfeiture of the benefit with the obligation to return the amount used.

The contribution is also granted within the overall expenditure limit of EUR 1,800,000 per year as from 2025, as well as within the limits for de minimis aid provided for in Regulation (EU) No. 2831/2023.

Provisions to foster institutional investment in innovative start-ups (Article 33 of the Competition Law)

Article 33, entirely replaced during the examination in the Chamber of Deputies, intervenes on paragraphs 90-94, of Article 1, of Law No. 232/2016. In detail, it establishes, as a condition for access to the non-taxability regime for income deriving from qualified investments in units or shares of Venture Capital Funds made by mandatory pension institutions (Private Pension Funds) and by forms of supplementary pension funds (Pension Funds), that the aforementioned investments must be at least equal to 5% (10% from the year 2026 onwards) of the basket of qualified investments resulting from the previous year’s statement. With a special safeguard clause, it recognises, in any event, the tax benefit for qualified investments made by such pension funds under the previous legislation. Moreover, the non-taxability regime is applicable to financial income deriving from investments made, prior to the date of entry into force of these provisions, by private pension funds and pension funds, regardless of the composition of the basket of qualified investments resulting from the previous year’s accounts. Finally, it provides that the Guarantee Fund for Small and Medium-Sized Enterprises may also support, with a guarantee granted against consideration, the risk capital invested by closed-end collective investment undertakings, including venture capital undertakings.

Incentives for foreign investors (Art. 35 of the Competition Law)

Article 35 of the law under review amends the Consolidation Act on Immigration in order to facilitate the entry and residence of foreign investors also in the case of investment in the capital of venture capital funds. In particular, through an amendment to Article 26-bis of Legislative Decree 286/98 (Consolidation Act of provisions concerning the discipline of immigration and rules on the condition of foreigners), it broadens the possibilities for foreign investors to obtain entry and residence permits in Italy outside of the established quotas, providing that this possibility is also granted in the case of an investment of at least €500,000 in instruments representing the capital of a venture capital fund, in addition to a company as already provided for by the current legislation.

Critical aspects of the new provision

While promoting innovation, the introduction of more restrictive criteria risks excluding some emerging companies that have potential but do not meet parameters such as increasing capital or increasing revenues by 100% per year.

It also leads to increased bureaucratic complexity. The system of incentives and facilities appears to be articulated and subject to various conditions (e.g. the obligation to maintain investments for at least three years for incubators and accelerators), which could slow down access to benefits.

The transition of start-ups to innovative SMEs is strictly regulated, with the obligation to fulfil stringent financial criteria. This may limit the scalability of some companies.

Conclusion

The Competition Act 2023 is a step forward in supporting innovation and investment, but it also poses new challenges for start-ups. Careful monitoring and possible corrective measures will be crucial to prevent the rigidity of the new rules from hindering the development of emerging companies with high technological potential. (photo by Trent Erwin on Unsplash)

ALL RIGHTS RESERVED ©