The European Commission has decided that two schemes planned by France with the aim of facilitating investment in innovative small and medium-size enterprises (SMEs) are in line with the EU rules on State aid.

In particular, the Commission is of the view that the two measures make up for a real gap in the market without unduly affecting competition within the single market.

On this point, Commissioner Margrethe Vestager, in charge of competition policy, said: ‘These two schemes provide better access to funding for high-growth-potential undertakings. They will enable the development of an environment that is conducive to job creation and growth, while limiting distortions of competition.’

The ISF wealth tax-SME scheme entails a reduction of 50% up to a limit of EUR18,000 per year in wealth tax (impôt de solidarité sur la fortune, or ISF) for individual taxpayers who subscribe to the capital of innovative SMEs by way of mutual funds for innovation (fonds communs de placement dans l'innovation, or FCPI) or local investment funds (fonds d'investissement de proximité, or FIP).

The scheme for exceptional depreciation of investment by businesses in SMEs supplements the ISF wealth tax-SME measure. It enables undertakings, whatever their size, to spread the depreciation of investments in SMEs over a period of five years. The investments concerned consist of the sums paid either for subscription in cash to the capital of innovative SMEs or for units or shares in venture capital funds, professional private equity funds or venture capital firms.

Both schemes, of a maximum duration of ten years, concern innovative SMEs which, at the time of the initial investment, have been active in their market for less than ten years following their first commercial sale.

The Commission examined the compatibility of the schemes with the Guidelines on State aid to promote risk finance investments (see also MEMO/14/14). This examination showed the aid to be necessary to stimulate investment that would not be provided by the market unprompted, leading to a ‘funding gap’ for certain innovative SMEs. The lack of funding derives from the information asymmetry between investors and entrepreneurs, attributable to the relatively early stage of development and innovative nature of the undertakings concerned.

The Commission also verified whether the aid was both necessary and sufficient to prompt investors (individuals and companies) to invest in innovative undertakings. Moreover, unlike direct State intervention, the tax incentive scheme makes it possible to tap private savings and rely as much as possible on market mechanisms. The Commission further checked whether the aid was proportional to the intended objectives, both in terms of investors and of the SMEs benefiting from investment.