Since mid-2015, Belgian legislation provides for a very interesting tax incentive for Belgian-resident private individuals who invest in the capital of a Belgian or EEA startup that is less than four years old. The first move was the tax shelter law of 10 August 2015, providing the framework and the many conditions for the personal income tax reduction of up to 45% of the capital invested. That law provided two ways of investing in startups, either by investing directly in the capital of a given startup, or indirectly, through a so-called “starter fund” that would then invest in a number of qualifying startups.

The latter option remained dead letter until now, as the necessary Royal Decrees setting out the conditions for approval and registration of starter funds had not yet been enacted. Until now, the only possibility for investors wishing to claim the tax reduction was to contact the startup directly, possibly with the help of a crowdfunding platform, and to participate in a capital increase of the startup in their own name.

When the crowdfunding law was enacted mid-2016, a variant to the direct investment was introduced. As of then, it was also possible to invest in a so-called “investment vehicle” set up by a crowdfunding platform, which then invests in a particular qualifying startup (see also here). This allowed the crowdfunding platform to collect funds from the public without the burdensome formalities related to having all of them as direct shareholders of the startup while each of the qualifying investors would still benefit from the tax incentive.

2 Indirect investment finally possible

Recently, on 5 March 2017, the Belgian federal government adopted a Royal Decree introducing two specific types of starter funds: the public starter fund and the private starter “privak/pricaf”. While both funds are closed-end funds, the public starter fund (openbare startersfonds/fonds starters publics) is a public fund which can be marketed to retail investors, but the private starter privak (private startersprivak/pricaf privée starter) is a private fund, with an entry ticket of minimum EUR 100,000. The public starter fund is subject to supervision by the FSMA.

3 Advantages

Compared to direct investment, indirect investment through a starter fund offers several advantages, the most important of which is certainly diversification. Taking into account that a large number of startups turn out not to be successful, the possibility to diversify and still enjoy the tax shelter may give a new boost to investment in startups. The starter fund must invest at least 70% of its assets in the capital of qualifying startups or loans to such startups.

Moreover, starter funds are subject to a number of obligations. For instance, the fund must guarantee that the startups it invests in fulfil the many conditions of the tax shelter and must be insured with an external insurance company to cover the risk that a startup would not be eligible for the tax shelter.

In conclusion, the diversification and legal certainty about the eligibility of the startups are important upsides to investing through a starter fund.

4 Disadvantages?

However, there are downsides as well: while the presence of funds managers is obviously beneficial where it comes to the wise choice of the startups and the management of the investment therein, they must be paid as well. Another downside: the tax shelter deduction is limited to 30% of the invested capital and the deduction is delayed with one year in comparison to direct investment.

Additionally, as both funds qualify as alternative investment funds (AIFs), they are subject to the law of 19 April 2014, including any licensing requirements resulting from such legislation. In effect, the public starter fund must either be licensed itself as an AIF manager or appoint a licensed AIF manager. The private starter fund must only do so if its assets under management exceed a EUR 500,000,000 threshold or a EUR 100,000,000 threshold if it is using leverage. Although public starter funds are in any case subject to the AIF license requirements, a public starter fund not exceeding the aforementioned thresholds is nevertheless also exempted from certain AIFM licencing requirements, such as the initial capital requirement and the obligation to appoint a depository.

While in general the public starter fund is more heavily regulated than the private starter fund due to its marketability to retail investors, the legislator has made the regulatory regime somewhat lighter than that for other types of public funds. A major difference in that respect is that for the public starter fund, there is no obligation to have its shares traded on a regulated market which is the case for other types of public funds. Furthermore, the public starter fund should request a registration with the FSMA and is subject to its supervision, whereas the private starter fund in principle only needs to be registered with the Federal Public Service Finance and benefits from a genuine “regulatory light” regime. Further restrictions are that public starter funds cannot engage in short selling, use leverage or grant security or guarantees of any kind. Also, both types of starter funds are required to distribute at least 80% of their net earnings to their investors.

Finally, both private and public starter funds are closed-end funds, which means that redemption of the investors’ shares and reimbursement of their contribution is not possible. If an investor would wish to liquidate their position after the 48 months’ period required to avoid a partial clawback of the tax shelter deduction has elapsed, they will be forced to find a buyer for the shares, which may not be easy. However, that is not different in case of a direct investment, and in the latter case, the negotiation position vis-à-vis the startup’s founders with respect to the exit may be more difficult than between a starter fund and a startup. It is to be expected that starter funds will provide a clean exit plan to their investors. In any case, the life of a starter fund is limited to 12 years.

5 Conclusion

When the market will offer a variety of starter funds, the possibility to claim a 30% personal income tax deduction by investing in a diversified pool of startups will likely boost the attractiveness of the tax shelter. The investment will remain a relatively risky one, but at least the difficulty of approaching the right startups, negotiating the terms and conditions of the investment with them and the uncertainty with respect to the eligibility of the startup are taken out of the equation, as they are shifted to the starter fund and, with respect to the eligibility criteria, to the fund’s insurer.

The eligibility criteria as well as the formal conditions of the tax shelter law remain complex and some of them can be interpreted in a number of ways. As of today, some questions with respect to the interpretation of the law are still not formally answered. Soon, however, insurance companies will be confronted with starter funds seeking coverage for the tax shelter eligibility of the prospective startups. Detailed due diligence of the startups and profound knowledge of the ins and outs of the eligibility criteria and their application will be required.