The Italian Tech Startup Scene – A Legal View by KWM Italy

We don’t hear as much as we would like to about tech startups in Italy, so when Artificial Lawyer saw that the Italian branch of Asia-Pacific-based law firm King & Wood Mallesons (KWM Italy) had launched a ‘Startup Hub’, it was time to find out some more.

Below is a Guest Post by KWM Italy Partner, Stefania Lucchetti. The post covers what is happening in Italy, especially from a legal perspective, which will probably be of most interest to investors, founders looking to launch in Italy and other lawyers with clients operating there.

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KWM Italy Startup Hub

Given the increasing importance that innovative startups and innovative SMEs play within our economic fabric, King & Wood Mallesons Italy (KWM Italy) has launched a new legal assistance service called KWM Italy Startup Hub.

This legal service is directed towards solid “innovative startups” and “innovative SMEs” which are setting up their activities or intend to better structure their activities for growth.

The hub has a specialized team in commercial law, corporate law and IT law composed of KWM Italy Partner, Stefania Lucchetti, who has over two decades of international experience in assisting, amongst others, technology companies including startups, as well as Associate Pietro Boccaccini and Trainee Alessandro Morleo.

Italy’s Startup Act – Jump-Starting Startups and SMEs

Italy is at the forefront in the regulation of startups and SMEs. An extensive regulatory framework has been set out in favour of this type of company, without imposing any sectorial or age-related restriction, as it is commonplace in other national legislations. The new instruments and supporting measures cover the whole lifecycle of the innovative enterprise: from its incorporation to its growth, development and maturity stages.

The first piece of legislation regulating this type of companies is Decree-Law 179/2012 (the so-called “Decreto Crescita 2.0”) that can appropriately be called “Italy’s Startup Act”. The Decree has introduced into the Italian legal system the definition of a new innovative enterprise of high technological value, i.e.the “innovative startup”.

The policy for “innovative start-ups” has been strengthened in the last years by several subsequent legislative interventions: provisions as the Decree-Law 76/2013 (the so-called “Decree on Labour”) that broadens the pool of eligible start-ups, the Decree-Law 3/2015 (the so-called “Investment Compact”) that introduces the “innovative SMEs” and the Budget Law for 2017 (Law 232/2016), that introduces incentives and tax benefits for these types of companies.

From their introduction into the Italian legal system and thanks to the constant attention paid by the legislator with numerous and pervasive regulatory actions, “innovative start-ups” and “innovative SMEs” have grown significantly and today they are no longer considered as a reality niche since they express over 2 billion euros in total turnover and offer about 50 thousand jobs.

 “Innovative Start-Ups”

From a business point of view, a startup is the start of any entrepreneurial initiative aimed at developing a new business. According to Italian law (i.e. the Decree-Law 179/2012), “innovative start-ups” are any companies with shared capital (i.e. limited companies), including cooperatives, whose capital shares – or equivalent – are neither listed on a regulated market nor on a multilateral negotiation system. These enterprises must also comply with requirements imposed by law, e.g.be newly incorporated or have been operational for less than 5 years, have a yearly turnover lower than €5 million, have as exclusive or prevalent company object the production, development and commercialisation of innovative goods or services of high technological value etc.

“Innovative SMEs”

Decree-Law 3/2015, (the so-called “Investment Compact”) introduced a new type of companies,i.e. the “innovative SMEs”, and extended to them most of the benefits envisaged for “innovative startups”. “Innovative SMEs” are companies with less than 250 employees and with a total turnover that does not exceed €43 million; in addition, they must meet other requirements, such as the incorporation as companies with shared capital including cooperatives, the shares of the company can not be listed in a regulated market, the last balance sheet has to be certified by an auditor or by a company of auditors registered in the auditors’ register etc.

The “innovative SMEs” operate in the field of innovation technology, regardless of the date of incorporation, from the social object and the level of maturation. The achieving the status of “innovative SME” can represent a natural continuation of the path of growth and strengthening of “innovative startups”.

Benefits set out by Italy’s Startup Act

The main benefits which Innovative Startups and SMEs can take advantage of are the following:

• Free and digital incorporation: “Innovative startups” can choose to draw up the deed of incorporation (and its successive modifications) by means of a typified standard model. The document can be signed by using a digital signature: e., the whole procedure can take place online through a dedicated platform and, as further advantage, its usage is free-of-charge. Anyway, such procedure remains voluntary: it is still possible to establish an S.r.l. by notarial deed, registering it in the special section of the Register afterwards;
• Cut fees: “Innovative startups” and “innovative SMEs” are exonerated from the payment of the stamp duty due to the registration in the special section of the Business Register. Moreover, the “innovative startups” are exempted from the payment of the annual fee usually owed to the Chambers of Commerce;
• Flexible corporate management:“Innovative startups” and “innovative SMEs” incorporated in the S.r.l., are provided with some particularities that imply radical changes in the financial structure of the S.r.l (g. create categories of shares with specific rights, offer capital shares to the public etc.) which make those companies closer to an Italian S.p.A.;
• Covering of losses:In case of losses, while ordinary companies must lower capital by the following financial year, “innovative SMEs” and “innovative startups” can do this for up to two financial years after they suffered losses;
• Tailor-made labour law in the “innovative startups”: Generally, “innovative startups” comply with the regulations on fixed-term contracts as defined in the “Jobs Act” (Decree-Law 81/2015). Therefore, “innovative startups” can hire a staffer on a fixed-term contract for a maximum of 36 months. However, in derogation to Jobs Act’s provisions, “innovative startups” can hire personnel through fixed-term contracts of any duration, even very short, which can be renewed as many times as wished. After 36 months, the contract can be renewed only once, for 12 months maximum, leading to an overall employment duration of 48 months. By the end of this 4-year period, the fixed term contract is automatically converted into an open-ended one.

Salaries due to workers employed in “innovative startups” can have a variable component linked to objectives and parameters for output and performance as agreed upon by the parties (such as the productivity of the employee or the profitability of the company etc.), including through stock options and work-for-equity schemes (please note that the revenues resulting from these financial instruments – that can be used to pay also the “innovative SMESs”’ workers – are tax deductible for both fiscal and contributory purposes and they are subjected only to taxation on capital gains);

• Tax incentives for investments in “innovative start-ups” (for “innovative SMEs”, these incentives will enter into force after the implementation of the dedicated interministerial decree, in accordance with the EU regulations on state aid): This benefit envisages for individuals a deduction on personal income tax (IRPEF) amounting to 30% of the amount invested, up to a maximum sum of € 1 million; for legal entities the benefit consists in a fiscal deduction on the taxable income for company tax purposes (IRAP) equal to 30% of the amount invested, up to a maximum of € 1.8 million. These subsidies apply both in case of direct investments in “innovative start-ups” and in case of indirect investments by means of other companies, such as CIUs, investing predominantly in “innovative startups”. The incentives are conditioned to a holding period of the shareholding in the “innovative start-up” for a minimum of 3 years;
• Equity crowdfunding: “Innovative startups”, “innovative SMEs” and also CIUs and other corporations that invest predominantly in “innovative startups” and “innovative SMEs” can collect capital through equity crowdfunding authorised online portals. Moreover, the 2017 Budget Law has launched the process to extend the applicability of this instrument to all Italian SMEs;
• Fast-track, simplified and free-of-charge accessfor “innovative start-ups” and “innovative SMEs” to the SME Guarantee Fund(“Fondo di Garanzia per le Piccole e Medie Imprese”): A State Fund that supports access to credit through guarantees on bank loans. The guarantee covers up to 80% of the bank loans granted to “innovative startups” and “innovative SMEs”, up to a maximum of €2.5 million per company, and it is provided through a simplified fast-track procedure;
• Fail fast procedure: “Innovative startups” are exempted from the standard bankruptcy procedure, preliminary closure agreements and forced liquidation in the event of an over-indebtedness crisis. As a result, waiting times are cut, and the administrative and reputational burden sharply reduced;
• Conversion to “innovative SME”: Successful “innovative startups”, now become “mature” companies with a sizeable experience and production value, and whose activities are still characterised by a significant component of technological innovation, can transition to “innovative SME” status. Furthermore, the Investment Compact has extended many of the facilitations conferred to “innovative start-ups” to a wider range of companies are characterised by a marked inclination to innovate.

It is worth noting that while for “innovative startups” the legislator settled to limit the benefits for a maximum of 5 years since their date of incorporation, for “innovative SMEs” as long as the legal requirements are met, the supporting measures are not subjected to any deadline.

Further Measures

In addition to the instruments part of the original package of regulations (“Decreto Crescita 2.0”), the Italian Ministry of Economic Development is engaged in further measures in order to support the innovation ecosystem. Among these initiatives, the following are worth noting: Smart&Start Italia(a subsidised financing scheme for “innovative start-ups” based in Italy), Italia Startup Visa(a new fast-track procedure for the emission of self-employment visas for non-EU citizens intending to set up an “innovative start-up” in Italy) and Italia Startup Hub (fast-track procedures of Italia Startup Visa to non-EU citizens that are already in possession of a regular residency permit who intend to stay in Italy beyond its expiry date to launch an “innovative start-up”).

Finally, two important measures applicable to all Italian enterprises are of particular interest for “innovative startups” and “innovative SMEs”:

• R&D Tax credit: From the fiscal year 2017 until 2020, the credit is equal to 50% of incremental annual costs (e. additional compared to a multi-annual average) for activities in R&D, both in-house (intra muros) and outsourced (extra muros). The tax credit is recognised up to an annual maximum of €20 million for each beneficiary. The basis for the benefit is calculated with respect to the average of the costs incurred over the 3 fiscal periods previous to the one current on 31 December 2016, as long as in each of the fiscal periods costs for R&D have been equal to or above €30,000;
• Patent Box:It consists in fiscal benefits on income deriving from the use of intellectual property. The Patent Box grants to companies an option to exclude from taxation 50% of the income deriving from commercial use of intangible assets (copyrights, industrial patents, commercial brands, trademarks).

Conclusion

Following the introduction of “innovative startups” and “innovative SMEs” within the Italian legal framework, considerably in advance of other European countries, these realities have proved to be a strategic lever for the development of the country’s economy.

In fact, the high rate of innovation inherent in the DNA of these new forms of companies can play a fundamental role in reviving growth and employment, especially youth employment, in Italy.

KWM Italy wants to provide its contribution to this exciting sector with the aim of helping startups and SMEs to effectively develop, or better organise and structure their ideas and their business.