According to a survey conducted by the Ministry of Economic Development, in Italy, by the end of 2020 compared to the previous year, the number of Innovative Startups increased by approximately 10.4%, surpassing the 12,000 mark, and Innovative SMEs increased by 567 units. This demonstrates the resilience and adaptability of the Italian entrepreneurial landscape, highlighting a significant inclination toward innovation.
However, the challenging economic situation we are currently experiencing has also impacted the financial performance of these particular types of businesses.
For these enterprises, it could be highly advantageous not only to take advantage of the existing tax incentives and facilitated financing programs (such as Smart & Start), but also to consider an alternative method of capitalization based on the appreciation of the work contributed by partners, administrators, or collaborators: the so-called Work for Equity.
Work for Equity was introduced into the Italian legal framework by the Growth Decree 2.0 (D.L. No. 179 of 2012) specifically for Innovative Startups. Its scope was later extended to Innovative SMEs by D.L. No. 3 of 2015.
Work for Equity is a capital increase operation in which professionals, external consultants, employees, partners, administrators, or more generally, service providers, whether individuals or legal entities, are compensated through the allocation of shares, units, or participatory financial instruments of the Innovative Startup or SME, rather than through monetary remuneration.
All capital companies can adopt this form of remuneration, provided they qualify as Innovative Startups or Innovative SMEs. The requirements for such company types are set out in Article 25 of D.L. No. 179 of 2012 for startups and Article 4 of D.L. No. 3 of 2015 for Innovative SMEs.
The legislator's intention was to encourage the establishment, development, and participation in Innovative Startups and SMEs, enabling them to benefit from services provided by third-party individuals, employees, partners, or administrators without requiring a cash outflow from the company's coffers. This is particularly beneficial, especially during the early years of operation when financial resources may be limited.
Work for Equity can involve all human resources working for the company, including partners, administrators, employees, suppliers, and professionals. It allows the company to increase its capital by recognizing the value of these individuals' work.
The symbolic compensation for the work of these individuals is increased into the company's capital without any tax implications for either the company or the service provider. This exemption also extends to social security contributions for administrators, employees, or continuous collaborators (not for external suppliers and professionals).
It should be noted that, even though the compensation through the Work for Equity instrument is not subject to income tax, in the case of a service or work provided by an external supplier or professional, it is still considered a service subject to Value Added Tax (VAT) (Circular No. 16/E of 2014 by the Revenue Agency). In such cases, the service provider is required to issue a regular invoice, inclusive of VAT. The service provider's performance date corresponds to when the innovative company records the cost of the service in its accounting or the invoice issuance date, if earlier, as specified in Resolution No. 35/E of 2005 by the Revenue Agency.
If the services have already been provided, the company will first record the deductible cost in the income statement and subsequently proceed with the capital increase, which can be subscribed by the service provider using the credit for the services already provided by them.
If the services fall under Research and Development costs as defined by National Accounting Principles (OIC 24), these costs can be capitalized, with the subsequent recording of depreciation expenses in the income statement.
In this case, the Work for Equity operation is particularly advantageous since, at its conclusion, the company will have an increased capital and a corresponding increase in assets on the balance sheet, specifically in the intangible assets category.
The company also benefits from the ability to deduct the entire cost of the services for the Work for Equity in the year of the operation or, in the case of capitalization as Research and Development costs, through the amortization process.
In summary, Work for Equity is a tool that allows a company to increase its capital (with or without share or unit premiums) by appreciating the work of partners, administrators, employees, collaborators, or service providers.
This is done without the value attributed to the services of these individuals being subject to taxation on their part, while being deductible for the company that benefits from it. Additionally, for services that qualify as Research and Development activities, the company can capitalize the costs and amortize them over several fiscal periods.
From an operational perspective, Work for Equity can be realized through the following stages:
As mentioned above, it is essential to verify in advance that the company meets the qualifications for being recognized as an Innovative Startup or Innovative SME and is, therefore, registered in the relevant section of the Business Register.
For an Innovative Startup or Innovative SME, implementing a plan to remunerate its service providers through a Work for Equity plan has significant benefits:
Our firm, in collaboration with a Certified Incubator and with our direct experience in advising the establishment and development of Innovative Startups and Innovative SMEs, can provide support in all phases of implementing a Work for Equity plan, including: