Many funding programs in this country are still unknown to a broad range of entrepreneurs. Not everyone is familiar withthe Invest program of the Federal Ministry of Economics, which has become even more attractive since the beginning of this year.
The current practice, which remains in effect, is as follows: Venture capitalists are reimbursed 20 percent of the investment amount upon acquiring shares—provided they meet certain requirements. For example, the investor must provide the company with at least 10,000 euros. In addition, the shares must be held for at least three years. If the investment is contingent on the company achieving certain goals, each individual payment must amount to at least 10,000 euros. The government has capped the maximum amount of grants: Each investor can receive grants for equity investments of up to 500,000 euros per calendar year.
The advantage of the Invest program for business angels: Their entrepreneurial risk is somewhat mitigated. Furthermore, the investment grant is exempt from income tax, thereby significantly increasing the incentive to mobilize private venture capital. The benefit for young companies: Their chances of finding a private investor increase with the program. The Federal Ministry for Economic Affairs points out that, since May 2013, 200 million in venture capital has already flowed into young companies through this program.
Now, since early 2017, the program has been further expanded. In addition to the acquisition grant, the tax on any subsequent capital gains can be offset on a flat-rate basis through the so-called exit grant.Specifically, this means that with an exit subsidy, the venture capitalist receives a lump-sum tax offset equal to 25 percent of the profit realized from the sale of the shares that were subsidized through the acquisition subsidy.
Another new feature is that the investor can also acquire the shares via a convertible loan. In this case, the acquisition grant—based on the converted amount—is paid out only after the conversion. Follow-on investments are also eligible for funding, provided that the acquisition of the shares held by the investor was already supported by the acquisition grant.
At the same time, the government has set limits: The exit grant is capped at 80 percent of the investment amount for the Invest shares. Furthermore, the acquisition grant and exit grant combined may not exceed the original investment amount. And for each company, investments by multiple investors totaling up to 3 million euros per calendar year may be supported by the acquisition grant.
This arrangement is attractive to business angels for several reasons: If the investor sells their shares after a minimum holding period of three years or if the company fails, they do not have to repay the grant. In the event of a sale at a profit, the tax on the capital gain is reimbursed at a flat rate.
However, government support programs are usually subject to a variety of requirements, and Invest is no exception.
For example, an eligible company must be no more than seven years old, employ fewer than 50 people, and have annual revenue of no more than 10 million euros. Furthermore, the company must have at least one branch office in Germany that is registered in the commercial register or the trade register. In addition, the company must be innovative; it can demonstrate this through patents, publicly funded innovation projects it has participated in, or expert opinions.
The government also imposes conditions on the investor. The investor must be a natural person with primary residence in the EU. The investor must not have held any shares prior to acquiring the stake. The business angel must hold the stake for at least three years. And—this applies specifically to the exit grant—the investor may not hold the shares for longer than ten years.
To initiate the process, the first step is to submit an online application to the Federal Office for Economic Affairs and Export Control (BAFA). Once the agency has certified the company’s eligibility for funding, the investor also submits an application to the agency online. The agency reviews this application for compliance with formal requirements and issues a decision to the investor.
Please note: The articles of association, bylaws, or investment agreement between the investor and the company—or the conversion of convertible loans—may not be finalized until the investor has submitted their application.
However, the agency’s approval notice does not need to be available at that time. After the investor has made payment for the shares, they request a tax-free refund of 20 percent of the investment amount from the agency. To do so, the relevant contracts or documents evidencing the investment must be provided.
