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Now you can become an investor with just EUR 3.000 and receive tax exemptions

Any natural person that invest betwenn EUR 3.000 and 200.000 in a small business will receive temporary tax facilities, according to Law 120/2005 regarding individual investors – busines angels. Contexpert has analyzed the provisions of the law, starting from the following questions:

1. Who can become a business angels and will the incentives be?

2. Will the law change the current investment behavior, does it provide legal means for the avoiding of taxation?

3. Is the law applicable in its current form?

The law regarding individual investor – business angels will come into force on July 17^th.

1. Who can become a business angel and will the incentives be?

The purpose of this law is to encourage natural persons to invest in companies. By doing so, they can receive tax incentives, through the acquisition of shares in microenterprises (net turnover or total assets of no more than EUR 2 mil and no more than 9 employees) and/or small enterprises (net turnover or total assets of no more than EUR 10 mil and between 10 to 49 employees)

What are the conditions that have to be met?

• The natural person comes from outside the company and gains his quality of associate through a contribution in cash or in kind to the share capital, resulting in the issue of new shares that are granted to him. The individual investor will obtain a number of shares at their nominal value, along with the share premium calculated for his contribution.;
• He invests between EUR 3.000 and 200.000, equivalent in Romanian lei, using the National Bank of Romania’s official exchange rate from the day in which he makes the capital injection. The obtaining of shares will take place through the increase of the share capital;
• The invested amount will be paid through the Romanian bank system and will be booked in the accounting, according to the law;
• The limits for the invested amounts apply for the total amount, no matter what the number of investors is;
• The investment is carried out for the sole purpose of fulfilling of the main activity of the company and the business plan for which the business angel will invest;
• The natural person does not have any offences registered in the tax records;
• The natural person will not gain, as a result of his contribution, in his name or through another person, more than 49% of the share capital of the company;
• The natural person is not incapable or was not convicted for any crimes against patrimony through misuse of trust, corruption charges, embezzlement, false in official records, tax evasion, infractions mentioned in law 656/2002 for the prevention and sanction of money laundering or for crimes mentioned in Law 31/1990 regarding companies.

What will the incentives be?

• Tax exemption for dividends for a period of 3 years, from the moment the investor gains the shares, for dividends granted for the owned shares, obtained according to the present law;
• Tax exemption for gains obtained from the sale of the shares owned in the company, if the sale of the shares happens after at least 3 years from the date of the investment.

However, tax incentives can be granted for a maximum of 49% of the share capital of the company, proportional with the percentage of the owned shares. Also, the total amount of the incentives which can be received cannot be greater than the invested value from all the business angels.

For example, if the value of the investment is EUR 3.000, a tax exemption on dividends can be granted for such amounts received in the following 3 years, but only for dividends amounting no more than EUR 3.000. For dividends received above this threshold, the Tax Code says that they will be taxed with the 16% tax rate.

How will the tax exemptions be granted?

• The business angel does not sell his shares after a period smaller than 3 years, period starting when the shares are received; If not, the investor owes tax on dividends for dividends that were exempt from the dividend tax, due to the granting of the tax incentives. These amounts will also bare late payment penalties. Also, the sale of the shares will be taxed according to the Romanian Tax Code.
• The incorporation article, submitted for the increase of the share capital through the issue of new shares, will also contain the following: the participation to profits and losses of the associates will become proportional with the percentage of shared owned by each associate; the decisions regarding the business plan and the renunciation of the profit granting, for the investments, will be taken by agreement of all the shareholders.
• The company and the associates do not use the share premium for the increase of the share capital and do not distribute it to the associates, for a period of 3 years from the registration of the business-angel in the company, at the Trade Register.
• The company does not have any outstanding debts to the state budget at the date of the sale of share from the business angel.

What are the conditions that have to be met by the micro and small enterprises in which investments will be made?

• They are limited liability companies (SRL)
• They are autonomous enterprises (they are not owned by other companies or do not own companies in a proportion of more than 25%)
• They are not in a state of insolvency or bankruptcy and the procedure of liquidation or deterrent composition has not begun.
• They do not carry out activities in the following domains: banking, insurance and reinsurance, capital market, financial intermediation, any other activities in the financial sector, real estate, lease of real-estate assets, intermediation in the real-estate sector, real-estate development; gambling and betting, production and merchandising of steel and/or coal; construction of ships for sea or river use; production and merchandising of weapons, ammunitions, explosives, tobacco, alcohol, substances which are under national control, plants, narcotic substances; consultancy in any domain.

Although the law does not mention, the word “carry out” should be understood as referring to the obtaining of income from those activities. As such, if a company has the NACE code for activities mentioned above, but does not render any of those activities; the investor’s right to the tax incentives should not be affected.

 2. Will this change the investment behavior, does it provide legal means for the avoiding of taxation?

The purpose of the law is to support investments made in small businesses, especially start-ups, which have limited acces to institutional financing (bank loans, state aids, non-returnable funds etc.)

In these conditions, tax incentives should represent an additional motivation, along with the opportunity of obtaining gains from a business and the confidence of the investor that he will obtain a profit from the sale of the social shares. However, the period for which the tax exemptions are granted is relatively small- 3 year – for a start-up to grow big enough to provide significant returns.

Due to this reason, the advantage for the company – which can finance itself with loans that do not bare interest – is obvious, but the advantage for the investor is less atractiv, especially because any investor takes into consideration more options when making such a decision: bank deposits, investing in the stock market, in real estate etc.

Therefore, such an investor has to be sure enough that the business he will finance has the capacity to grow quickly. Only that, for a business to grow, it has to reinvest its profits, from which we can conclude that, for the first three years, it is better that no dividend payouts will be made. In conclusion, it is unprobable that the exemption of the tax on dividends can be considered atractive.

In this context, the issue which is raised is what if the provisions of the law will be used by those who wish to benefit from the tax exemption on dividends, using start-ups as vehicles for tax optimizations, and less by those who are trully looking for business oportunities.

3. Is the law applicable in its current form?

The law needs application norms, so that it can be applied. There need to be explanations, for things such as the tax registration of business angels so that they can receive the tax exemptions or documents necesarry for providing proof of the business angel status to the tax authorities.