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Across the Channel, authorities are noticing Britain’s successes as an early-stage innovation “hub” and are wanting to gain similar results. In particular, France is set to emulate the UK by introducing its own tax relief scheme for tech startups and early-stage investors.
Below, we explore what the proposed scheme looks like, how it compares to the UK and the opportunities/issues that could present to investors. We hope these insights are helpful to you.
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What is the French tax relief scheme?
France is quite far behind the UK when it comes to business angel numbers. In 2013, the UK had 4,350 angels and France had 4,320. By 2021, however, the numbers had grown to over 15,000 and 5,500, respectively.
This is not to say that France does not have an impressive angel ecosystem. As a highly developed country, there are some notable, sophisticated family offices including Kima, Financière Saint James and Aglaé. However, the ecosystem is also quite “closed” and difficult for outsiders to penetrate.
To try and address such problems and encourage investment into French startups, Paul Midy – MP in the National Assembly – has been commissioned by the government to find ways to increase investment into French tech startups.
His result is a new report called the Soutenir l’investissement dans les start-ups, PME innovantes et PME de croissance. Its core premise is to reform France’s Young Innovative Companies scheme (YIC), which we will unpack below.
Proposed changes for the French scheme
The French YIC was originally intended to help home-grown companies with funding for research and development (R&D). Established in 2004, it offers fiscal advantages to certain SMEs in France – such as exemption from income tax or corporate tax for a 24-month period.
Midy’s proposal, however, is to remodel the YIC scheme into two categories: Young Companies for Innovation and Growth (JEIC) and Young Companies for Innovation and Rupture (JEIR).
Echoing the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) in the UK, moreover, early-stage investors would also enjoy new tax benefits under the new scheme – i.e. tax reductions of 30% to 50% for investments worth up to €500,000 per person per year.
Investors would also be allowed to invest at these preferential rates if the target companies meet certain criteria (e.g. they are 8-12 years old).
Implications of the new scheme
The Midy proposals could generate an extra €3 billion of funding per year. This will be vital if President Macron wishes to achieve his vision of France becoming Europe’s “leading digital ecosystem” by 2030.
Yet France still lags behind the UK in terms of startup fundraising. France achieved €13.5 billion in 2022, which beat Germany’s impressive €10 billion. However, the UK achieved more than double the French figure. Even with €3 billion more fundraising, France would still be second.
However, this is not to pour cold water on the Midy report. The proposals, in our view, would push France in the right direction to help the country avoid losing digital sovereignty to US and Chinese companies in the coming years.
France has had some strong successes in its tech sector. Yet the time has come for it to move beyond investments in apps for food deliveries or media streaming services. As Jean-Luc Beylat, chairman of the Systematic Paris-Region cluster, says:
“Now we have a very strong pull for deep tech, in quantum computing, photonics. The investment is more complex, and we need more money.”
Hopefully, if France adopts the Midy report, this will be good news – indirectly – for the UK’s early-stage scene. Although it could lead to more investment flowing towards French startups compared to British ones, the higher competition gives the UK government a strong incentive to retain, and even improve, its tried-and-tested EIS and SEIS schemes.
Another interesting aspect of the Midy report is its idea to open up more opportunities for French life insurance and employee savings plans (e.g. pensions) to invest in early-stage companies. At the moment, most private savings focus on lower-risk assets – leading to missed opportunities for investors who could benefit from the rapid growth offered by many SMEs.
This sounds similar, in some ways, to UK Chancellor Hunt’s recent proposal to allow pension providers to venture further into private equity – potentially releasing up to £75bn of retirement funds for fast-growing startups.
France currently does not allow pension funds to invest in startups. Letting them do so would, again, add pressure to the UK government to pursue the course outlined by Jeremy Hunt. Both nations, it seems, are keen to become the next Silicon Valley.
Already, France has launched some impressive early-stage funding initiatives. The Tibi 2 programme, for instance, has attracted 28 institutional investors to pledge €7 billion – building on the successes of the first programme in 2019.
These are encouraging noises from both the UK and France. Hopefully, business angels in both countries can enjoy two growing, thriving startup ecosystems in the coming years – fuelled by generous tax advantages!
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