Written by Sébastien Lachaussée
& Elisa Martin Winkel
In 2007 the introduction of the TEPA law aimed to relaunch employment and French's purchasing power.
This “fiscal package” gathered various measures, a subsential proportion of them in favour of the small and medium size enterprises (SME). The tax benefits that TEPA planned in favor of investments into SME, even if modified have survived the reforms and still constitute an advantage.
Indeed TEPA law has instituted a tax incentive system in favor of SME’s correlate to the French solidarity tax on wealth (ISF). This system is commonly called TEPA ISF. The taxpayers liable for the ISF predicted by the French tax code (CGI) can benefit from a tax reduction if they suscribe for shares of a SME. This reduction can be up to 50% of their investments in the limit of 45.000 euros. In the same time, and that's the main point, SMEs can hope for more investments laying on the TEPA ISF mechanism.
We will not linger on the tax benefit itself as long at it is really a French matter but we will focus on the SME. At thirst we will evoke the conditions for a SME to be recognized by the TEPA ISF system (I) and then we will see how this system can be helpful for SME (II).
I) Conditions for a SME to be recognized under the TEPA
The enterprise benefiting from the investments has to fulfill some criteria about its shape and its activities.
These conditions are pretty simple : in the first place the SMEs must correspond to the Community definition of the SME, in the second place some activities are moved aside.
In order to fulfill the Community criteria the SME must notably :
- employ fewer than 250 persons
- have an annual turnover not exceeding 50 M euros and/or an annual balance sheet total not exceeding 43 M euros
- practice exclusively commercial, industrial, craft industrial, freelance or agricultural activities
- have its place of effective management in a European Union member State or party to the Agreement on the European Economic Area,
- not have its securities admitted to trading on a regulated market
- be submitted to the corporation tax
The enterprise must not practice any of the following activities:
- activities with guaranteed revenues because of regulated prices
- financial activities (except for social enterprise)
- management of moveable heritage
- real estate activities (except for social enterprise)
- and solar energy production
Moreover it is capital to precise that the investments can be done through an holding company or a local investment fund. It is understood that such investments must enter in the initial aim of the TEPA law and benefit to SMEs. Such resort to an intermediary only allows the investor to minimize the risk of the investment by sharing it and to avoid him to check the SME compatibility with TEPA law, because this is delegated to the intermediary.
Now that we have seen which kind of societies are eligible by the TEPA law to receive investments we can consider how they can benefit from the tax incentive mechanism.
II) Benefits from TEPA for SMEs
The TEPA measures enable SMEs to solicit investors to find the necessary funding for their activities and their development. They can propose to the investors a partially covered investment thanks to the tax benefit. The increase in the balance of the SME can allows them to finance development projects, but also to increase its borrowing possibilities from banks, which is essential.
Speaking of amounts: as we said previously, the law provides that the investors can obtain a tax deduction up to 50% of their investment in the limit of 45 000 euros. In facts it means that a investor who wants to minimize his tax is going to invest a maximum amount who can reach 90.000 euros. This investment will benefit directly to a SME. It is to notify that a decrease of these thresholds has been evoked before the last reform but, for now, they have fortunately been maintained.
Since it has been created, this measure has known a great succes and French ministry for Economy reckons that since its creation the TEPA measure generates 1 Md euros towards SMEs every year. The TEPA measures is undeniably a great help for SME's fundraising.
It is important to say that, the SMEs must issue some shares and therefore they lose a part, maybe substantial, of their decisional power. This risk has been limited since the law recognizes the shares premium as an investment and in that way a SME can issue a tiny number of shares and benefit from a significant investment from the share premium without losing the control of the society.
We can see there that the law has been conceived to support SME and the important volume of the investments seems to confirm that it is a complete success.
Nonetheless the efficiency of the TEPA law is regularly contested, mostly because it doesn't seem to help the development of the micro and small enteprises but only the medium size enterprises. This is to be a problem because most of the medium enterprises do not lack of funds or are already eligible to bank credit. In facts, the investors prefers to invest in perennial and already well developped firms because it is less risky. As the law does not make any difference between medium and micro entreprises, the latter are mostly neglected. In facts the only real way for micro and small enterprises to obtain some funds is to sign with a holding society or a support fund but they obtain less important sums because of the percentages claimed by the intermediaries.
The use of the TEPA law seems to empty it from its initial aim and could be put into question. Some people, such as Gerard Rameix, Credit mediator and President of the Observatory of Corporate Finance, consider that the tax credit should be only oriented toward micro and small SMEs, meaning SMEs employing less than 20 peoples. This perspective is not to neglect when we know that such a disctinction has been made recently for others measures of the TEPA law.
It appears that the TEPA measures helps the SMEs by making easier their search for cash funds and investors. However, this device is often disputed whether it is applicable thresholds or eligible beneficiary companies and realignments could come in significantly change the scope.