What does the startup tax shelter mean? The tax shelter, literally a "tax shield," is a tax incentive designed to boost specific sectors by granting tax relief to those who choose to invest in them. In 2003, the first tax shelter was introduced to encourage investment in Belgian cinema. This mechanism was a resounding success, though it also led to certain abuses, which prompted a reform in late 2014.

Apart from borrowing the name—no doubt because it sounded good—the startup tax shelter has little in common with the original one. While the new tax shelter provides a tax deduction under personal income tax (IPP), the cinema tax shelter is intended for companies looking to reduce their corporate income tax (ISOC).

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Why this new mechanism? 

The current government, driven by Minister Alexander De Croo, wished to implement a startup plan to boost the growth of young companies, allow them easier access to the necessary financing, and turn our country into a "Digital Belgium." This startup plan is broken down into 4 distinct measures:

  1. Tax shelter for startups, detailed below.

  2. Attractive tax framework for crowdfunding.

  3. Lower labor costs for young entrepreneurs.

  4. One-time deduction for investments in digital technology.

Under what conditions does the tax shelter apply? 

Only investments made from July 1, 2015, onward are eligible. The startup must be less than 4 years old. It must be an SME under the law (2). The investment must have served to form the company or increase its capital. Acquiring existing shares is therefore excluded. All business sectors are eligible, except for management companies, investment or treasury companies (pure holdings), and those whose primary activity is construction or real estate. Companies listed on the stock exchange, insolvent companies, or those resulting from a merger or demerger are excluded. Finally, there must have been no dividend distribution or capital reduction, which is quite logical given the intended goal. For those who do not wish to invest in a specific startup, it is possible to invest through a starter fund, e.g., crowdfunding. The fund must be approved and the investment must be registered (in the investor's name). This formula allows investors to rely on professionals and diversify their risk.

What is the advantage of this new tax shelter? 

Investors benefit from a personal income tax reduction of 30%, and up to 45% if it involves a micro-enterprise (total balance sheet of max €350,000, turnover of max €700,000, and a maximum of 10 employees). This is therefore a major tax incentive aimed at convincing prudent investors to directly finance early-stage companies. What are the limits to this deduction? Each investor is capped at €100,000 of investment per year and cannot hold more than 30% of the startup's capital. Furthermore, they cannot hold a management mandate. However, nothing prevents them from being employed by the company in which they invested. On the other hand, the fundraising cannot exceed €250,000 in total. The legislature clearly wanted to favor small businesses and retail investors. The holding period for the equity stake is a minimum of 4 years. If the stake is sold before this term, tax will be due pro-rata for the remaining time.

What conclusion can be drawn? 

We have often advocated in these columns for a framework that stimulates entrepreneurship. The various measures of the startup plan head in this direction and must therefore be applauded. Regarding the new tax shelter, it is nevertheless regrettable that this measure targets only the startup niche. In the case of a micro-enterprise, a tax reduction of up to €45,000 (45% of €100,000) is so incentive-driven that it is highly likely the market will strongly structure itself around this tax windfall. The risk of seeing abuses in this area, as has happened in others, is real. When the time comes for a re-evaluation, perhaps it would be wise to consider a better distribution of the tax incentive. Indeed, mature companies, which form the backbone of our economy, certainly deserve a boost, particularly at the delicate moment of their transfer.