From a study carried out by the Ministry of Economic Development in Italy – at the end of 2020 regarding the preceding year – the number of Innovative Start Ups grew by about 10.4%, exceeding the quota of 12,000 units, and Innovative SMEs increased by 567 units, thereby showing the capacity for resilience and adaptation of the Italian entrepreneurial fabric, and its notable aptitude for innovation.
The grave economic situation that we are experiencing, however, has not spared even the economic advancement of these particular forms of business.
It could therefore prove interesting for such businesses to benefit not only from the fiscal concessions and financial interventions currently available (such as for example the Smart & Start and Smart Money programs), but also to consider adopting an alternative method of business capitalization, based on enhancing the work of partners, administrators or collaborators: Work for Equity.
Work for Equity was introduced into the Italian legal system by the Growth Decree 2.0 (D.L. n. 179 of 2012) to serve as the institution specifically aimed at Innovative Start Ups. The scope of application of this institution was subsequently enlarged to include Innovative PMIs through D.L. n. 3 of 2015.
Work for Equity is an operation of increasing social capital, by which professionals, external consultants, employees, partners, administrators or, more generally, providers of work or services, be they physical or juridical persons are paid through the assignment of Innovative Start Up or PMI shares, quotas, or participatory financial instruments, rather than by payment in money.
All corporations can adopt this method of remuneration, if they are qualified as Innovative Start Ups or Innovative PMIs. The requirements for being such companies are detailed in art. 25 of D.L. n. 179 of 2012 for start ups and by art. 4 of D.L. n. 3 of 2015 for Innovative PMIs.
The intent of the legislation was that to promote the creation, development and participation in Innovative Start Ups and PMIs, allowing them to benefit from the performance of work or services carried out by third parties, employees, partners or administrators, without there being an outflow of liquidity from the company coffers, which especially in the first years of activity, might turn out to be particularly limited.
Work for Equity for all human resources
Work for Equity can involve all human resources working in favor of the business: partners, administrators, employees, suppliers and professionals. It allows the capitalization of the business by enhancing their work.
The figurative compensation of the work of these individuals is in fact enhanced, with an increase in share capital and without any fiscal imposition either against the head of the business or against the provider of work or services. This exemption extends also to social security contributions for administrators, employees or continuative collaborators (not for external suppliers and professionals).
It should be specified that remuneration through the Work for Equity instrument, although not subject to income tax, in the case of work or service contributions by suppliers or professionals, should be considered in any case as performance subject to VAT (Circular n.16/E of 2014 of the Agenzia delle Entrate). In these cases, however, the provider must give a regular invoice, which includes VAT. The moment of performance for the providers is when the innovative business registers the cost of the performance in its own account, or the date of submission of the invoice if earlier, as specified by Resolution n. 35/E of 2005 of the Agenzia delle Entrate (Revenue Agency).
If the performances have already been carried out, the business accounts will show first the deductible cost in the economic accounting and successively proceed to the increase in social capital, which can be undersigned by the provider through the use of the credit for services already made by the same.
When the performances have as their aim activities that enter into Research and Development costs, as defined by the National Accounting Principles (OIC 24), these costs can be capitalized, with successive inscription in the income statement of the relative quotas of depreciation.
In this case, the operation of Work for Equity is particularly advantageous since, at its conclusion, the business will find itself with an increase in social capital and a corresponding increase of assets on the balance sheet, specifically under the category of intangible assets.
Furthermore, the business will have the benefit of being able to deduct the entire cost of the performances earmarked for Work for Equity in the year of carrying out the operation or, in the case of capitalization, such as Research and Development costs, through the process of depreciation.
Work for Equity is an instrument that allows business capital to be increased (with or without surcharge of shares or quotas), enhancing the work of partners, administrators, employees, collaborators, or providers of work or service.
This comes about without the value attributed to the provision by individuals being fiscally taxable against them, but at the same time deductible for the business, which benefits, with the possibility for the latter when this involves qualified performances such as research and development activities, to capitalize the costs and, in this way, divide them over several fiscal periods through depreciation.
Business Capitalization: the operative phases of Work for Equity
From a strictly operational point of view, Work for Equity can be done according to the following operative phases:
1. Definition of the Work for Equity plan.
2. Stipulation of contracts of Work for Equity with the various providers involved in the plan, with analytic indication of the activities to be carried out as well as the agreed upon objectives, of the evaluation of the remuneration upon achieving the objectives and the consequences in case of default by one of the parties.
3. Final technical report certifying achievement of pre-fixed objectives.
4. Valuation report by an independent professional certifying value of the performance.
5. Eventual modification of the statute in order to adapt it to new business needs.
6. Decision regarding the increase of social capital by the shareholders meeting with subscription of the increase using Work for Equity.
As specified above, it is necessary to verify in advance that the business has the characteristics to be qualified as an Innovative Start Up or Innovative PMI, and is consequently enrolled on the specific section of the Company Registry.
Why implement a Work for Equity plan
For an Innovative Start Up or Innovative PMI, implementing a remuneration plan for its own providers of work, labor or services through a plan of Work for Equity presents significant benefits.
• Financial and fiscal advantages: Work for Equity does not result in an outflow of liquidity from the business coffers and the related cost is fiscally deductible; speculatively, the earnings for the providers of work or service do not compete with the formation of the overall earning (art. 27 of D.L. n. 179 of 2012 for the innovative Start Ups and art. 4 of D.L. n. 3 of 2015 for the innovative PMIs).
• Improvement of the business image: proceeding with an increase in social capital for specialized individuals who give their own work or service, the business image in the market of reference is improved.
• Loyalty of the individuals involved: the providers of works or services find themselves assuming, following the provision, the quality of partner, or of increasing their participation. Therefore, they have an interest in the business developing positively and producing profits.
• Improvement of the bank rating: capitalization of the business improves its position in encounters with the banking system, with consequent greater possibility of accessing lines of credit at more advantageous conditions.
What we can do for you
Our studio MGI Vannucci & Associati, also thanks to collaboration with a Certified Incubator and with the experience acquired directly in consulting on setting up and developing Innovative Start Ups and Innovative PMIs, is able to provide support in all phases of achieving a Work for Equity plan, in particular:
• Assistance and consultation for drawing up the necessary documents, including the Work for Equity plan and the letters of appointment.
• Assistance and consultation, in coordination with the notary, in drawing up the necessary resolutions and acts.
• Accounting, business, and fiscal consultation for the correct management of the Work for Equity operation.