EU Authorises French Tax Scheme To Promote Investment In SMEs

by Ulrika Lomas, Tax-News.com, Brussels

13 March 2008

The European Commission announced on Wednesday that it has decided not to raise any objections, under the EC Treaty rules on state aid, to France's decision to reduce solidarity tax on wealth (ISF) in certain circumstances, with a view to promoting investment in SMEs.

EU Competition Commissioner Neelie Kroes explained that:

"The tax scheme encourages investment in SMEs, in particular those with the greatest potential for growth, on near-market terms. It is expected to provide support for SME activities and thus for the industrial fabric and employment."

The scheme is part of the fiscal package adopted by France in August 2007. It proposes relief on ISF up to a maximum of EUR50,000 per year for any investment made directly or indirectly in an SME. The reduction in ISF is proportional to the investment made and varies according to the method of investment.

There is a proportionately lower rate of relief for investments made through investment funds. The estimated cost of the scheme is EUR445mn in 2008, but the scheme is expected to stimulate new investment in SMEs of the order of EUR635mn.

The scheme was notified on October 11th 2007 to the Commission, which analysed it in the light of the Guidelines on state aid to promote risk capital investment in SMEs, which encourages aid in the form of tax incentives.

Given the specifics of the scheme, which includes aid to medium-sized enterprises undergoing expansion, the Commission carried out a detailed examination.

The scheme promotes the activity of SMEs by encouraging investors to provide them with risk capital. It also aims to promote the activities of business angels in France and thus to support the risk capital market. The Commission has assured itself that the distortions in competition caused by the scheme will be limited since it creates near-market conditions by offering a variety of investments, all of which are eligible for tax benefits.

ISF taxpayers can invest either directly in an SME, via an investment fund or via holding companies such as investor clubs. Moreover, the scheme is part of a wider package of measures to promote SME activity.

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