IO

Start Act: the draft law that can boost the world of Italian startups

By Andrea Di Camillo, Managing Partner of P101 SGR | November 15th, 2018

From the Startup Act to the Start Act. A new regulatory framework (just a draft, at the moment) that should give a ‘shock to the Italian startup ecosystem’ – in the words of its petitioner, MP Mattia Mor. This proposal follows the 6-years-old first ad hoc legislation on startups, the Decree-law 179 of October 2012. Today, as then, this law aims to make Italy more competitive, to fuel its most dynamic and innovative part: i.e., startups. And it tries to do so through a policy of strong incentives to investments.

From the point of view of venture capital, it’s a positive proposal which widens and deepens what was already done in 2012. To back our judgment, here are some figures from a report by OECD, Evaluation of the Italian Startup Act. The Startup Act was designed with the stated intent of creating a better environment for innovative startups, equipping them with a series of tools: including quick and free founding, simplified bankruptcy procedure, tax incentives for equity investments and public guarantees to access bank credit. All of this seems to be working, according to the OECD report:

‘The policy has allowed companies to increase their turnover, added value and assets by around 10-15% compared to similar startups that have not benefited from it, or have benefited from it at a later stage of development. The empirical analysis also shows that the registered companies are more likely to obtain bank loans [and] VC funding.’

However, as effective as it might be, the 2012 policy alone was of course not enough to ensure that startups succeeded. Also, it has created a very crowded market. ‘Structural reforms are also necessary to the well-being of the entire economy, such as improving the efficiency of civil justice … and the fight against corruption and tax evasion,’ states the OECD. ‘The need for a synergistic political action is linked to … the scarcity of venture capital investments and the weakness of the domestic end-market of innovative goods and services,’ writes the OECD.

And the Start Act proposal (here) seeks to fill this gap, at least as far as venture capital is concerned. It does so mainly through tax incentives for startup financing. In particular, Article 2 provides that, from 2019, the maximum deductible amount for private investors will increase from 1 to 2 million euros, and from 1.8 to 4 million euros that of: companies investing in startups and innovative SMEs, venture capital funds, vehicle companies promoted by incubators, accelerators and business angels. Also, the IRPEF and IRES deduction rates would increase from 30% to 70%, and up to 80% for employees investing in corporate venture capital funds. Moreover, capital gains coming from investments in startups would be tax-exempt, and for capital losses there would be a 50% tax deduction. Furthermore, the draft law introduces a 70% tax deduction on the costs of acquisition of a startup or an innovative SME (within 4 years). Deductions rise to 90% for innovative companies that are subject to bankruptcy, provided that the new owner keeps the former employees.

The new proposal goes a step further and in Article 3 introduces tax incentives that are specifically aimed at the ongoing development of startups: 70% deduction on the costs of starting a corporate VC fund (within 4 years); 170% amortization when buying new tangible and intangible assets produced by startups, as well as when investing in Open Innovation projects in collaboration with incubators and/or technology transfer offices.

Article 4 establishes a Fund of funds, co-matching (50%) investments into seed funds, and domestic and  foreign VC funds operating in Italy.

Furthermore, article 5 introduces the obligation for pension funds and similar companies to invest 0.5% of their revenues (which is about 220 billion euros) in private equity, VC funds and certified Italian incubators. Article 6 introduces the obligation to invest 5% of PIR revenues (the Italian ISAs) into the above-mentioned funds, with the possibility of deducting 100% of potential loss.

And then there’s the State. Article 7 establishes the creation of a Fund for the development of startups with a yearly 40 million euros budget from 2019 to 2021. The Fund will grant non-refundable loans to investment projects by non-resident subjects who want to create a start-up company in Italy (up to € 100,000 per project). It will also co-finance (50%) projects by local authorities in the fields of digital, startups, early stage investments, also in collaboration with international players.

The last section of the law proposal focuses on the theme of work. It calls for a labour costs tax reduction for under-40-years-old permanent employees hired by startups and innovative SMEs. It also compels companies to allow for a period of leave for workers who create or are involved in managerial activities at startup companies and innovative SMEs. It also provides for grants in the form of vouchers to encourage consultancy by temporary CEOs, CFOs, COOs, CMOs and digital managers.

In order to improve the operating environment in which startups and innovative SMEs carry out their full scientific, technological and industrial potential, the new draft law introduces measures that facilitate access to Big Data archives of State administrations and their subsidiaries. And the constitution and development of university spin-offs are simplified (also in terms of intellectual property and patents).

All these provisions go straight to the point of developing innovation.