Financing Companies

For more employment, we need fiscal measures that will increase France's Business Angels tenfold

30 novembre 2006 • l'équipe de la Fondation iFRAP

iFRAP's Proposal : copy the English EIS model, which has proven itself by raising the limit of the Madelin benefit from 40,000 to 500,000 € for equity investments in the Small Business Community, and providing exemption from capital gains if titles are conserved more than 3 years.

Version française

Over the past 20 years, the team at iFRAP has explained that the secret weapon of the Americans, the source of their economic success, was implemented in 1958 with tax measures that encouraged well-off but not necessarily wealthy individuals, to invest their money in the creation or development of businesses in their neighborhood. Each year, 500000-1 million Business Angels investing a total of nearly 100 billion dollars are the unknown artisans who contributed to the American success stories called Google, Microsoft and Intel. Over 90% of these successes are non-technological ; they are centered in distribution, catering, marketing, etc. and are the source of extra jobs, on average 300,000 per month, that make up the U.S. economy (excluding periods of recession). The economy of a developed country depends on the continuous invention of new products or new services to replace those affected by obsolescence or outsourcing. This is how in the early 19th century our parents replaced agriculture, which still accounted for 80% of jobs, with manufacturing and services.

For this kind of creative innovation to happen, we need that the people with ideas, the entrepreneurs, be able to find the money to materialize their dreams – amounts of money that lie between 100,000 and 2 million € for 99% of projects. An entrepreneur can overcome the bureaucratic obstacles, social costs, or tax burdens by working more, but he or she cannot overcome a lack of funding.

This is one of the characteristics of the French market : according to our comparative studies with Great Britain – a European country using a model similar to the Americans with 50,000 Business Angels - the British invest about 7 to 10 billion in the creations of companies, with about 5 billion coming from Business Angels. In France, we are barely reaching 1.5 billion.

It's to catch up on lost time that iFRAP suggested in 2004 that, if the ISF tax cannot be eliminated, it can at least be rendered useful by inciting those who pay the tax to exempt themselves from it, by investing twice as much in start-up capital. Based on this suggestion, we obtained that Article 16 of the TEPA law be voted in early August 2008. The State expects some 650 million € of additional investments in our creations. Unfortunately, the law limited the tax deduction to 50,000€ per year, or an invested 66,666 €, which is much too low to induce an investor to give free time and energy to the business in which he or she invests (characteristics of a business angel). This measure can be used as a tool for tax exemption, but gives little incentive to become a Business Angel.

The British have understood this concept, and their equivalent measure, the EIS, pushes to invest each year up to 500,000 £, and 1,000,000 £ for a couple (or approximately 1,4 million€). This happens at no cost for the British Treasury since the British sales tax brings in a higher amount than the tax deduction from the first year onwards.

This is what we must achieve : making it clear at Bercy (French Treasury) that tax incentives like raising the maximum limit of the Madelin benefit to 500,000 € (a deduction of 25% of the amount of investment, currently capped at 100,000€) but limiting the benefit of this measure for sufficiently small company investments (less than 2 million of equity, or as defined by the EEC, Small European Businesses ) is a win-win measure for the Treasury, because it will help create jobs, and, as all surveys show, the fiscal cost will be offset by the extra VAT collected as soon as the first year.