Current financing environment
As in other East – European countries, small and medium – size companies in Romania have, in previous years, been faced with a shortage of financing resources, and have been forced to rely mainly on personal resources to grow their businesses. In an environment where banks have been increasingly reluctant to lend to small or mid-size companies and where private equity funds have focused their investments on stable and mature businesses, start-ups have experienced significant difficulties in securing financing.
However, a number of high net – worth individuals have been acting as business angels by using their own money to finance various innovative businesses.
Against this background, in May 2015 the Romanian Parliament passed a law dealing with angel investing and the tax benefits granted to angel investors.
New law on angel investing
Effective June 2015, the new Law on Angel Investing (Legea nr. 120⁄2015 privind stimularea investitorilor individuali – business angels) regulates tax relief opportunities for business angels who invest in micro-or small-size companies.
The Romanian law on Angel Investing allows any individual to become an angel investor in relation to a micro or small-size company, irrespective of the company’s net worth or certification. For an investment to qualify for the benefits granted by the Law, the following conditions must be met:
(i) the target company should be a limited liability company (societate cu raspundere limitata), which is statistically the most common form of incorporation for start-up companies (over 80% of existing companies);
(ii) the business angel should not be “connected” with the company;
(iii) the value of the investment should range between Euro 3,000 and Euro 200,000; and
(iv) the shareholding of the business angel should not exceed 49% of the share capital of the target company.
Tax relief for business angels
Investments in start-up companies – and generally in non-listed companies – often carry high risks, and tax relief has been introduced to compensate to a certain extent for them. The current tax scheme offers relief for both income tax and capital gains tax which have generally been welcomed by the business community.
In particular, the Law on Angel Investing offers the following tax breaks:
(i) Business angels are exempt from the tax on dividends for a period of three years from the investment. In practical terms, this exemption may be less relevant for an individual looking to become an angel investor, as the Law on Angel Investing was promoted in parallel with the new Romanian Fiscal Code (effective 1 January 2016), which provides for a significant decrease of the tax on dividend for all shareholders, from the current rate of 16% to 5%. Additionally, since business angels typically seek investment opportunities in start-ups, the likelihood of distributable profits during such period is rather remote to begin with.
(ii) Business angels are further exempt from capital gains tax for share disposals initiated at least three years after the investment.
Business angels may also syndicate their investment in a given target, but in such cases the overall value of dividend tax reliefs may not exceed the value of the syndicated investment.
The Law on Angel Investing also sets forth various conditions applicable to the tax relief, such as the requirement that there be no outstanding tax liabilities for a target company at the time of a share transfer, and the requirement that there be express provisions in the articles of association regulating the pro-rata participation of the shareholders in the profits and losses of a target company and the requirement that votes on the business plan and profit distribution be unanimous.
Five months after the enactment of the Law on Angel Investing the relevant application process for business angels to reap the promised tax benefits and the ways to avoid potential forfeiture of the benefits remain unclear. Nonetheless, the combination of potentially fast – growing sectors such as IT, medical services and tourism as well as the enactment of laws meant to stimulate investments in a market – segment that has been poorly served by traditional financing methods is expected to result in an overall increase of start-ups, with potentially strong returns for the angels taking business risks.
The current tax scheme offers relief for both income tax and capital gains tax which have been welcomed by the business environment.