Innovative SMEs: requirements and advantages

The expression “innovative SMEs” refers to a category of small and medium enterprises which benefit from a specific favourable tax regime, introduced with Law Decree no. 3 dated 24 January 2015, converted by Law no. 33 dated 24 March 2015. Said regime was introduced following to the one dedicated to innovative start-ups, with the aim of strengthening the competitiveness of the Italian productive scenario and, in particular, of promoting a more widespread diffusion of technological innovations.

In particular, within the Italian industrial planning, innovative SMEs fall within the scope of the wider technological development plan defined “Industry 4.0”. Small businesses, which play a key role in the Italian business fabric, are considered as the drivers able of leading the IV industrial revolution by investing in technological innovation to solve the longstanding productivity problems which have been affecting Italy for more than 20 years now.

The favourable tax regime was introduced 6 years ago, but it is worth underlining that its adoption by Italian SMEs has been much lower than expected. To date, only little more than 2,000 enterprises are registered with the dedicated innovative SMEs Register, but it is deemed that the number of Italian businesses potentially meeting the requirements for the registration is at least 10 times as much.

If only less than 10% of the businesses potentially meeting the requirements for accessing the dedicated register have actually proceeded with the registration, it is legitimate to wonder whether the benefits provided for by law are actually so advantageous.

Before analysing the benefits dedicated to innovative SMEs, it is worth specifying which businesses are the beneficiaries of said favourable tax regime. The law extended the scope of eligibility to the status of innovative SMEs to all small and medium enterprises having an innovative corporate object, incorporated as joint stock companies (S.r.l. - limited liability companies, S.p.A. - companies with liabilities limited by shares, or S.a.s. - limited partnerships) or cooperative companies, without providing for any limitation regarding the industry, based on the assumption that technological innovation is a characteristic that can be met in any business sector.

Given the difference with innovative start-ups, the regime dedicated to innovative SMEs does not provide for any limitation as concerns the date of incorporation of the company, although it sets specific size constraints. Such constraints, relevant to small and medium enterprises are specified by the Commission Recommendation dated 6 May 2003 no. 2003/361/EC and will be analysed in detail in the following section.

Besides said size thresholds, further cumulative and alternative requirements are provided for innovative SMEs, partially coincident with the requirements for innovative start-ups. Specifically, in order for a business to be enrolled in the dedicated innovative SMEs Register, it has to meet a series of requisites, namely:

1. having being incorporated as a joint-stock company, also as a cooperative;
   
   
2. being resident either in Italy, pursuant to art 73 of the TUIR (consolidated income tax law) (Presidential Decree no. 917 dated 22 December 1986 and further amendments and integrations), or in any other member State of the European Union, or in States party of the agreement on the European Economic Area, provided that it has a production facility or a branch in Italy;
   
   
3. having obtained the certification of the last financial statements and of the consolidated financial statements, if any, released by an auditor or audit company registered with the roll of legal auditors (newly incorporated companies are exempted from this requirement);
   
   
4. not having shares listed on a regulated market;
   
   
5. not being registered with the special section of the Companies Register dedicated to innovative start-ups and certified incubators.

With reference to the innovative nature required to innovative SMEs, in addition to the cumulative requisites, businesses need to meet at least two of these alternative requisites:

1. having a volume of expenditure in research, development and innovation equal to at least 3% of the higher between cost and total value of production. Expenses for the purchase and rental of immovable property are excluded from the calculation of expenses in research, development and innovation, whereas expenses relevant to the purchase of highly innovative technologies are included.
   
   The following expenses are to be considered as expenses for research, development and innovation: expenses relevant to pre-competitive and competitive development, such as experimentation, prototyping and industrial plan development; expenses relevant to incubation services provided by certified incubators (art. 25, para. 5 of Law Decree no. 179/2012 converted with modifications by Law n. 221/2012); gross costs for internal staff and external consultants employed in research, development and innovation activities, including shareholders and directors; legal expenses for the registration and protection of intellectual property, terms and licences for use.
   
   Said expenses need to result from the last approved financial statements and to be described in the notes to the accounts.
   
   
2. having at least 1/5 of the total number of employees or collaborators of any title holding a doctorate degree (PhD), or studying for a PhD at an Italian or foreign university, or holding a university degree and having carried out research activity certified by public or private research institutions for at least 3 years, either in Italy or abroad, or having at least 1/3 of the total workforce holding a Master’ Degree.
   
   
3. holding, also as custodian or licensee, at least an industrial property right relevant to an industrial or biotechnological invention, to a topography of a semiconductor product, or to a new plant variety, or holding the rights relevant to an original computer programme registered with the special public Register for computer programmes, provided that said property right is directly referred to the corporate object and core business.

Having clarified the requirements to be met in order to enrol in the special Register for innovative SMEs, we set out below the different benefits provided for by law for such businesses.

Tax incentives for investments in the equity of innovative SMEs

The first provision analysed is probably among the most interesting, since it is aimed at promoting the capitalisation of small and medium-sized businesses, by reducing their indebtedness levels. This measure provides for a tax relief for subjects investing in the equity of innovative SMEs through a share capital increase.

This measure, introduced by Budget Law 2017 and reinforced by the so-called Relaunch Decree (art. 38 of Law Decree no. 34/2020), provides for a deduction from the gross Irpef tax equal to 50% of the investment, up to max 300,000 Euro as for individuals; and for a deduction from the IRES taxable base equal to 30% of the invested amount, up to max 1.8 million Euros, as for legal persons. In order to benefit from the tax relief, the investment need to be maintained for a minimum holding period of 3 years.

Rasing capital through equity crowdfunding campaigns

With the same aims as above, the law introduced the possibility first for start-ups and later also for innovative SMEs to access fund raising through equity crowdfunding campaigns. Italy was the first country globally to regulate this market through the creation of a dedicated register of authorised online portals.

This fundraising method provides the possibility for more people (crowd) to contribute money, even small amounts, to finance an entrepreneurial project. The investment is made entirely online through portals managed by financial intermediaries and it is in essence a contribution of risk capital which gives right to a title in the share capital of innovative SMEs and thus on the equity and administrative rights of the company.

It is worth underlining that in case of investment in the risk capital through crowdfunding campaigns, the subscription of shares will be made directly by the authorised intermediaries acting in the name and on behalf of investors operating through the online portal.

Therefore, within 30 days from the closure of the crowdfunding campaign, said intermediaries are required to file with the Companies’ Register a certification demonstrating their title as shareholders on behalf of third parties and, at the same time, to provide the investors with a certificate demonstrating their title on the shares held, in order to legitimate their exercise of corporate rights.

Free-of-charge and simplified access to the SME Guarantee Fund

Among the benefits, innovative SMEs are granted free of charge, direct and simplified access to the SME Guarantee Fund (also FGPMI). This fund, regulated by Ministerial Decree dated 23 March 2016, is public funded and facilitates the access to finance by providing guarantees on bank loans. These guarantees cover up to 80% of the credit line granted by the financial institution, up to max 2.5 million Euro.

Nonetheless, pursuant to the Fund’s new operating provisions, applicable to the applications filed starting from 15 March 2019, the conditions for SMEs to access the guarantees provided by the Fund significantly differ from what provided for innovative start-ups and certified incubators. Without prejudice to the gratuitousness, which remains valid for both categories of businesses, the Fund’s intervention is actually no longer in automatic: innovative SMEs are now subject to a creditworthiness assessment by the Fund.

It is specified that, as in the past, innovative SMEs are refused direct access to the Fund in case they are certified in the lowest credit rating range. There is in any case another point of full coincidence between the norms regulating two business categories: as for start-ups, also for eligible innovative SMEs, the Fund’s guarantee covers 80% of the operation, regardless of the company’s rating – whereas for other companies the coverage level is variable and often lower.

As indicated in the 26^th periodic Report by the Ministry of Economic Development, updated at 31/12/2020, operations managed by the Fund in favour of innovative SMEs are 3,105 (up of 1,000 units compared to the previous reporting period), for a total invested amount of over 1 billion Euros.

The funding operations in favour of innovative SMEs which, to date, have had a positive outcome amount to 2,769 (89.2% of the total), a value significantly higher compared to Q3 2020, in which they were 1,685 (80.4% of the total for the quarter). The operations involved 1,041 businesses, 254 more than those registered in the previous quarter.

As a final note, it is specified that, following the pandemic emergency, art. 38, para. 6 of Law Decree no. 34/2020 (Relaunch Decree) reserved an amount equal to Euro 200 million Euro specifically dedicated to the issuance of guarantees in favour of start-ups and innovative SMEs.

Exemption from stamp duties for deeds filed with the Chamber of Commerce

Innovative SMEs, pursuant to art. 4, para 9 of Law Decree no. 3/2015, are exempted from the payment of the stamp duty normally due for the enrolment in the special section of the Companies’ Register and for the deeds relevant to the Register.

Services for the internationalisation of businesses (ICE)

The ICE Agency (Agency for the foreign promotion and the internationalisation of Italian businesses - Ministry for Foreign Affairs and International Cooperation) sustains Italian businesses during the internationalisation process by providing information, training, promotion and consultancy services to get to know foreign markets, identify new opportunities and consolidate international relationships. Innovative SMEs, according to the provisions of Law no. 33/2015, benefit from a 30% discount on the purchase of the services above (with the exception of external costs).

Departures from the ordinary corporate regulation

All innovative SMEs, incorporated as limited liability companies (S.r.l.) are allowed to:

• create categories of holdings with specific rights (e.g. categories of holdings which do not grant voting rights or which grant voting rights not proportionally to the holding);
• carry out operations on treasury holdings;
• issue participating financial instruments;
• offer shareholdings to the public.
  
  

Extension of loss coverage terms

In order to support innovative SMEs having temporary difficulties, the Law has provided for an extension of the ordinary terms to cover losses exceeding 1/3 of the share capital. In case a company record losses leading to a share capital reduction for more than one third, as a departure to the provisions of the Italian Civil Code, the term by which the loss should be reduced to less than one third is postponed to the second subsequent FY (instead of the first subsequent FY).

In case of a reduction of the share capital below the minimum threshold provided for by law, the shareholders’ meeting, as an alternative to the immediate share capital reduction and its simultaneous increase for an amount not lower than the legal minimum, can resolve to postpone the relevant decision to the next FY end.

It is specified that, in response to the epidemiological emergency, the Liquidity Decree (art. 6 of Law Decree no. 23/2020) first and the Budget Law 2021 (art. 1, para. 266 of Law 178/2020) later, introduced the possibility for companies - on a temporary and exceptional basis - to neutralise the losses recorded in FY 2020, postponing to the fifth subsequent FY the term (provided by art, 2446, para. 2 and art. 2482-bis, para. 4 of the Italian Civil Code) by which the losses need to be reduced to less than one third of the share capital.

Derogation to the regulation on shell companies and companies systematically making a loss

Innovative SMEs are not subject to the norms regulating shell companies and companies systematically making a loss. Therefore, in case they attain “non consistent” profits, or they consistently record tax losses, the tax penalties provided for shell companies are not automatically applied to them, e.g. the allocation of a minimum income and of a minimum taxable base for Irap tax purposes, the limited use of the VAT credit, the application of a 10.5% Ires tax surcharge.

Remuneration through shareholdings

In order to promote the participation of employees, directors and collaborators in the company’s equity and to remunerate their work through an incentive plan, i.e. with shares or shareholdings, it is possible for innovative SMEs to adopt work for equity and stock option plans. The income deriving from the allocation of these instrument does not contribute to the formation of the taxable income, neither for tax, nor for social security purposes.

Support to venture capital

The Decree of the Ministry of Economic Development dated 01/10/2020 implemented the Venture Capital Support Fund, devised to support investments in the capital of innovative start-ups and innovative SMEs, with a first allocation of 200 million Euros.

The Fund’s initial investments in the target companies are made through “convertible loans”[1], while the possible subsequent interventions are made through equity investments.

Through this Fund, it will be possible to issue resources up to maximum 4 times the value of private investors’ contribution, within the total limit of 1 million per each start-up or innovative SME.

Generally speaking, the investment will be focused on start-ups and innovative SMEs which, at the time of the Fund’s intervention, meet the following conditions:

• have their registered office and actually carry out their activity or development programs in Italy;
• have real development possibilities, measurable basing on quantitative and/or qualitative indicators, evidence of which can be provided through compliance with at least one of the following criteria:
  • an increase in revenues, clients or service users in the twelve months preceding the investment by the Fund;
  • a sustainable three-year industrial plan approved by the relevant administrative body;
  • strategic contracts or partnerships;
  • registered patents with industrial exploitation potential, as well as during a possible research and development phase, basing on the certification of the proposed technology;
• have no assessment provisions underway;
• successfully pass the assessments relevant to risk management, compliance with regulations or prevention of money-laundering and terrorism financing risks possibly carried out by the asset management company (SGR).

In order to promote new investments, it is provided for that these need to be made in favour of start-ups and innovative SMEs which are making an investment round or which have completed one maximum in the six months preceding the entry into force of the Relaunch Decree.

In conclusion, having examined the requirements and advantages provided by the current regulation of innovative SMEs, it would be desirable that the number of Italian companies which actually proceed with the registration with the dedicated section of the Companies’ Register will increase significantly.

In order for this to actually happen, the path identified by the Industry 4.0. Plan will hopefully be the right one to stimulate Italy’s economic recovery, although it will be necessary to decidedly invest in those businesses, which more than others are able to drive technological innovation. Consequently, a further strengthening of the incentives already provided will be needed, as well as the introduction of new incentives for Research and Development activities and a reduction in the red-tape burdening the administrative and tax management of these businesses.

[1] These are instruments which do not entitle to a repayment or refund, generate figurative interest income at a rate equal to 5% per year and which are subsequently converted into equity. It is worth noticing that it is not possible to convert the investment in equity. It is not possible to repay the loan without conversion into equity.