Law-Decree no. 34/2020, better known as “Decreto Rilancio”, enriches the package of measures aimed at supporting the companies and encouraging the resumption of the business after the abrupt interruption due to the spread of the Covid-19 virus.
Among the measures provided for in the legislative provision in question, the Article 26, entitled “capital strengthening of medium-sized enterprises“, introduces tax and financial incentives to encourage the capitalization of SMEs affected by the lockdown.
The rule aims to reward equity investments, first of all through the benefit of a (double) tax credit, which operates on two fronts: (i) in favor of the shareholder, who makes the contribution, and (ii) in favor of the company, which receives it.
In addition, according in the same provision, the companies benefiting from the “privileged” capital increase are allowed to issue debt securities and/or bonds, intended to be subscribed by a purposely-established public fund, subject to some specific commitments by the issuing company.
With regard to the requirements to qualify for the tax benefit, the rule states that the capital increases must be in favor of companies with share capital and cooperatives (excluding financial intermediaries and insurance companies) which have:
- registered office in Italy (to which the permanent establishments in Italy of UE resident companies are assimilated);
- received revenues, for 2019, between € 5 million (or € 10 million for companies that also intend to benefit of the further financial supporting measure) and € 50 million (values that, in groups of companies, must be calculated on a consolidated basis);
- recorded, due to Covid-19, a decrease in consolidated revenues in the two-month period March-April 2020 higher than 33%, in comparison with the same period of 2019.
and whose capital increase is approved and fully executed by 31.12.2020.
Subject to conditions above, the single investor will be entitled to a tax credit equal to 20% of the contributed amounts – including the surcharge – with a maximum investment threshold of € 2,000,000 (the tax credit cannot, therefore, in any case, exceed € 400,000).
The exclusion of intra-group capital increases is a strong limitation to the benefit’s operation: no bonus shall be granted to companies even indirectly connected to entity which receives the contribution.
Finally, in order not to lose the bonus, the shares allocated as a result of the capital increase must be held until 31 December 2023. And also the distribution of reserves by the company before that date will result, on the one hand, in the forfeiture of the tax benefit, and, on the other hand, in the obligation to reimburse, by the individual shareholder, the amount of the tax credit he has received, together with interest. The question remains whether the distribution of operating profits has the same effect.
For the beneficiary company the tax credit could be equal to 50% of the losses exceeding 10% of shareholders’ equity, gross of the losses themselves, up to 30% of the capital increase carried out. In addition to the requirements above, the benefit is subject to the fulfilment of further and more stringent conditions.
The companies at issue must be “virtuous”, i.e. in compliance with the provisions on tax, social security, construction/urban planning, labour, work and environmental safety, and without criminal records.
Similarly to the rules for the shareholders’ benefit, the distribution by the company of any type of reserves (and perhaps even profits) before 1st January 2024 will result in the forfeiture of the benefit and the obligation to reimburse the bonus, together with legal interest.
The legislator also specified that both tax credits – the one in favor of the shareholder and the one in favor of the company – may cumulate each other and with the other support measures introduced to face the current Covid-19 emergency, and that the total amount of these measures, taken together, shall not exceed the sum of € 800,000.
To this end, the legal representative of the company must submit a self-certification form, attesting the compliance with such limit.
In summary, these are the fiscal benefits, whose use is subject to a deadline, which can be combined with the additional financial benefit.
In fact, the companies whose capital is increased as described above, can to issue bonds or debt securities, subscribed by a fund (SME Equity Fund), for an amount equal to the lower between the amount of the capital increase multiplied by three and 12.5% of the revenues for 2019 fiscal year.
By express regulatory provision, the issuance of securities is allowed, even beyond the limit set forth in Article 2412 of the Italian Civil Code, i.e. beyond the limit of twice the shareholders’ equity.
Among the few features of the loan set by the rule, it should be noted that the financial instruments shall be redeemed by the issuing company six years after subscription. However, early redemption is allowed, three years after the subscription date. Interest will accrue annually, but will be paid in a lump sum on the date of repayment of the principal.
However, the subscription of the securities is subject to the following commitments by the issuing company:
- not to resolve or make distributions of reserves and/or purchases of own shares or quotas, nor the repayment of loans to shareholders, from the date on which the application for the benefit is filed until the date of full repayment of the related issued financial instruments;
- to allocate the financing to support personnel costs, investments or working capital for premises and business activities located in Italy;
- to provide the fund manager with a periodic statement of the characteristics of the loan, in order to allow verification of the achievement of the objectives agreed between the company and the lending institution, which can conventionally be qualified as possible conditions for reducing the value of the repayment.
A number of interpretive questions remain open, which, hopefully, will be answered more precisely in subsequent implementing regulations, in particular, with regard to the features of the loan, starting with the possible limitations on early repayment (which are indispensable for the possible allocation of the loan to the beneficiary’s equity, as it would be logical to expect given the rationale of government intervention), ending with the possibility of providing for specific administrative rights, additional to those indicated in the decree, aimed at allowing the lender a greater control over the management of the company, including, for example, rights of prior information and/or rights to appoint members of the Board of Directors or, more likely, of the board of auditors.
Once the implementing secondary regulation is passed and in force, we will find out which of these issues will be ruled by specific provisions of law, and which will instead be left to the autonomy of the private negotiations for the determination of the rules and peculiarities of any given loan.
SMEs shall surely have to provide themselves with adequate professional support, in order to structure the operation in the best possible way, with regard to the situation and the needs of the company, and to carry out the necessary detailed negotiations with the public fund. The choice of a tailored advisory support with non-standardized and independent approach (i.e. free from possible conflicts of interest arising from professional assistance also provided to the public side’s different structures) can really make the difference.
Author: Dott. Mario Manfredi
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