The tax treatment of crowdfunding in Italy

7.10.2022

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Fiscal & legal Fiscal Legal e fiscal Tax Fiscal facilities Patrimony

Through crowdfunding startups as much as SMEs can gain access to new and alternative forms of financing

Through crowdfunding start-ups as much as SMEs can access new and alternative forms of financing

Widespread capital raising through crowdfunding can be initiated for a variety of reasons: entrepreneurial, humanitarian, social, political

What is Crowdfunding?

Among the alternative finance tools, without a doubt, crowdfunding is the one that, in the last period, has been most successful: in fact, the widespread capital raising allows numerous subjects, without particular difficulties, to get financed a project, perhaps innovative, even though the presentation of the same on a dedicated web platform and a consequent capital raising by investors who participate with amounts of different and different consequent rights. The Bank of Italy defines crowdfunding as "an instrument through which a plurality of parties can request funds from a plurality of potential lenders, through online platforms, for personal use or finance a project." The parties involved in crowdfunding operations, in general, are:

the owner of the project to be financed
the investors
the intermediary organization in the form of a crowdfunding service provider that brings project owners and investors together on an online platform.

Crowdfunding is a macro-category, and as such, it takes the form of various funding models that allow, through the participation of multiple parties, to develop a particular type of product, promote a project, or raise funds to support a cause.

Taxation of crowdfunding

Regarding the taxation of crowdfunding, premised on the fact that the regulations are complex and it is always a good idea to submit one's position to an expert advisor, we identify tax treatments related to the scope of VAT that affects the various models of widespread capital raising (lending, royal, equity, etc.) and the concessional tax regimes provided by the regulations. In the case of capital raising through crowdfunding, investments made through online portals will follow the same tax treatment as investments made through traditional channels. Profits are subject to a withholding tax of 26 percent if received outside the business activity. In this sense:

In social lending crowdfunding, a 26% rate will be applied to interest received by those who lend money through digital platforms (platforms that must be operated by companies authorized by the Bank of Italy)
For royalty crowdfunding income, the royalty will have to qualify as capital income to be subject to the 26% withholding tax if paid to resident individuals.

The types of crowdfunding and the tax implications

There are at least four types of crowdfunding, each of which has different tax characteristics. In this regard, the following types should be briefly considered:

"Reward crowdfunding" consists of a tool that allows a company, usually an innovative start-up, to present a product to the market before starting its official production.

From a tax point of view, through this type of crowdfunding, companies secure cash flow in advance, and a certain number of already potentially interested consumers (who can be rewarded with shares or units of the company itself) under certain conditions a pre-sale of an object or service could take place, and therefore VAT could be applied.

In "equity crowdfunding," investors purchase shares or units and the issuance of corporate equity.

In this case, since these are exempt transactions concerning transactions related to the purchase of shares or quotas or the issuance of corporate shareholdings, there will be no application of VAT.

"Royalty crowdfunding," as the name implies, allows supporters to be recognized for some royalties, that is, shares of the profits that the financed project will pay in the future as a counterpart of the financial participation in the project.

In this circumstance, the transaction is subject to the application of VAT.

In so-called "social lending," crowdfunding takes the form of alternative financing to bank credit.

The granting of financing through this model involves the payment of an interest rate and the repayment of the borrowed sum. Under certain conditions, there is an exemption from the application of VAT.

Advantages of crowdfunding

This alternative finance tool is becoming increasingly popular among start-ups and small and medium-sized enterprises because, in addition to being an alternative source of financing, including as venture capital, crowdfunding can offer a variety of other advantages:

It allows business risks to be minimized
It can represent a validation for a business idea
it will enable entrepreneurs to connect with a large number of people
can be a marketing tool that makes it easy to reach an unspecified number of individuals

What's new about crowdfunding

As of September 2022, due to the enactment of L. 4 No. 127 of Aug. 4, 2022, it is possible to fund through this mechanism even beyond national borders. Intending to strengthen the European business market, the new regulation removes previous constraints that hindered the use of collective microfinancing across domestic borders. In this sense, therefore, the crowdfunding market becomes cross-border and, as such, dramatically expands the pool of potential funders.