Income tax reduction for subscriptions to the capital of SMEs temporarily increased to 25%

Newsletter - October 2020

Payments made by natural persons to subscribe to the capital of certain unlisted companies grant a right to a tax reduction that is permanently obtained subject to holding the securities for five years.

Certain conditions are required:

  • When the subscription is made directly by the taxpayer:
    • contribution in cash upon the incorporation or on the occasion of a capital increase of an unlisted SME having its effective registered office in a European Union Member State, Norway, Iceland or Liechtenstein, which does not qualify as a company in difficulty and engages in an industrial, commercial, craft, farming or professional activity,
    • the company must meet the European definition of SMEs (fewer than 250 employees and annual sales figure not exceeding €50 million or annual balance sheet total not exceeding €43 million),
    • the company must be registered for corporate income tax and have at least two salaried employees on the closing date of the year following the subscription or one employee if the company is under the obligation to register with the chamber of trades (chambre des métiers et de l’artisanat),
    • the equity held must not be integrated into a stock savings plan or an employee savings product.
  • When the subscription is made indirectly through a holding company:
    • the holding company’s sole object must be to hold interests in companies engaging in one of the eligible activities listed above,
    • the holding company must meet all the conditions mentioned above except for those relating to the nature of its activity (by nature, the company only has a financial and not a commercial business), the stage in the development of its activity on a market (not operate in a market or have operated in a market for less than 7 years), the number of employees and the total amount of payments (€15 million),
    • the holding company’s corporate officers must only be natural persons and must not be shareholders of the companies in which it reinvests.

Income tax reduction rate:

In principle, the income tax reduction is equal to 18% of the eligible payments within an annual limit of €50,000 for a taxpayer who is single, widowed or divorced, and €100,000 for taxpayers who are married or in a civil partnership subject to joint taxation. Surplus payments grant entitlement to the tax reduction under the same conditions for the following four years.

The rate of the tax reduction is temporarily increased from 18% to 25% for payments made on or after 10 August 2020 up to 31 December 2020. The tax reduction for subscriptions to investment fund units (innovation-focused investment fund (FCPI) or proximity investment fund (FIP)) is also temporarily increased to 25%.

Reversal of tax reductions:

The reduction is only permanently obtained if the equity securities are held up to 31 December of the fifth year after the year of subscription. If all or part of the equity securities granting the reduction is/are sold before that date, the tax reductions obtained are reversed. The reduction is reversed in the year in which the sale takes place.

The reduction is not reversed:

  • in the event of a donation of the securities to a natural person, if the donee takes over the obligation to retain the securities sold,
  • death, disability or redundancy of the taxpayer (or their jointly taxed spouse),
  • merger or split-up if the securities received in exchange are held to the end of the retention period applicable to the original securities.

Income tax return:

To obtain the reduction, payments made in 2020 should be declared in form 2042C (line 7 CF). Payment deferrals and tax reduction calculations are done by the tax administration.

At the request of the administration, the taxpayer must be able to produce the individual statement issued by the recipient company and any document proving the retention period of the securities granting entitlement to the tax reduction.

The monthly newsletter is distributed free of charge to the firm’s clients via email. This document is designed to provide information and may not reflect the most recent legal developments. Clients and readers should not take action or refrain from taking action on the basis of information contained in this newsletter without seeking professional advice.

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