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The “Italian Startup Act” is a comprehensive legislative package that has substantively changed the environment in which Italian innovative enterprises operate.
What are the main aims and objectives?

Overall, the Italian Startup Act aims to create a more favourable environment for small businesses and start-ups, allowing them to grow and succeed. 

The legislation states that the goals of the policy are to promote sustainable growth, technological development and new entrepreneurship and employment, with a particular attention for young people. Additionally, the policy aims for contributing to shape a new entrepreneurial culture, a business ecosystem more conducive of innovation, enhancing social mobility and attracting foreign financial and human capital.    

How does the program work?

The Italian Startup Act defines Innovative startups as companies that fulfil the following requirements: 

  • to be less than 5 years old; 

  • to have their HQ in Italy, or in another EU country as long as one production site is in Italy; 

  • to have a yearly turnover lower than €5 million (approx $5.5 million); 

  • not to distribute profits; 

  • to produce, develop and sell high-tech innovative goods or services; 

  • not to result from a merger, split of sell-off of a company or a branch; 

  • their innovative character is further specified by one out of the three following criteria: 

  1. R&D expenses are more than 15% of the annual costs of the company; 

  1. 1/3 of its workforce are researchers, PhD holders or students, or 2/3 of it hold a Master's degree; 

  1. the enterprise is the holder, depositary or licensee of a registered patent relatable to the core business of the company, or is the owner of a registered software.   

Start-ups that match this definition have to register to the Start-up Registry in order to activate policy benefits. The main benefits for innovative startups can be divided into five main categories: tax incentives, loan guarantees, simplified administrative procedures, tailor made labor laws, and special bankruptcy procedures.   

Tax incentives 

Individual investors in registered startups benefit from a deduction of their personal income tax equal to 30% with an upper limit of €1 million (approx $1.1 million). Likewise, corporate investors benefit from the same rate of deduction with an upper limit of €1.8 million (approx $2 million).  

Loan Guarantee Fund 

Debt financing is supported through a fast-track public guarantee on bank loans up to €2.5 million (approx $2.7 million), covering a maximum of 80% of the sum borrowed. The average value of a loan granted through the Fund is €165,000 (approx $180,000), and the average duration of a loan is around 60 months. 

Cuts to Red Tape 

In the early stage, innovative startups can be incorporated by using a digital, standardized model, available online, with a massive reduction of transaction and intermediation costs. Innovative startups are also exempted from many duties and fees. 

Tailor made labor rules 

The act recognises that start-ups need greater labor flexibility at inception. As a result, startups are subject to labor regime that is based upon an “employment at will” model instead of the much more restrictive rules for other companies. Furthermore, they are able to use stock options and work-for-equity schemes.     

“Fail fast” mechanism 

Startups can access a faster and cheaper bankruptcy procedure. Additionally, can also postpone recapitalization in case fresh capital is called to repay yearly losses by one additional year. 

What is the overall cost?

The Italian Startup Act was legislated without any financial cost. However, the Act contains provisions with costs attached such as the Loan Guarantee Fund and tax exceptions.  

Data from the Revenue Agency in 2014 shows that a total of €51 million (approx $56 million) was invested in innovative startups at a cost to the government of roughly €10 million (approx $11 million).  

The Italian government has reported that the Loan Guarantee fund managed 19,901 financing operations during the period 2013-2021. These transactions secured €4.3 billion for innovative startups with the scheme guaranteeing over €3.4 billion of the loans. It is not clear how much of this figure the Italian government has been obliged to pay.  

How was it implemented?

The main responsibility for the policy stands with the Italian Ministry of Economic Development, in particular with its Directorate General for Industrial Policy, Competitiveness and SMEs, which carries out most direct tasks and all coordination activities. Being a very broad policy with systemic relevance, many different institutional actors are involved in some of its areas: 

  • The Italian Chambers of Commerce, a decentralized system with over 100 local chapters, manage the Registry of Companies and carry out direct administrative control on innovative startups registered in its special section;    

  • InfoCamere, the parent IT company of the Chambers of Commerce, is in charge of all the technicalities connected to the special section of the Registry, and set up the web-service by which startups can be incorporated online;        

  • Consob, the Italian Securities and Exchange Commission, has the responsibility for enacting regulations on equity crowdfunding;   

  • The Italian Revenue Agency (Agenzia delle Entrate) oversees tax-based incentives such as the 30% break for equity investments;        

  • Invitalia, the national agency of the Ministry of Finance for development and attraction of foreign investment, manages the direct financing initiative Smart&Start Italia and other communication activities; its parent company Invitalia Ventures manages the first public venture capital matching-fund, Italia Venture I.  

It must, in addition, be recalled that Italy has a partly devolved government and that Regions and other local authorities also offer targeted support to innovative startups, broadly following the same definition found in the national legislation. The type and the extent of this support vary from region to region: special call for tenders and local corporate tax breaks are commonplace. 

The task of practically assessing such effects is conferred to a permanent system (Committee) of Monitoring of Evaluation, composed of members of the Ministry, the National Institute of Statistics and other actors involved in the policy. 

Timeline 

October 2012: The core elements of the Italian Startup Act are issued in the decree-law 

December 2012: The Italian Startup Act is validated by law 

March 2015: A significant update was made by the passing of the Investment Compact which extends the duration of the special regime to 5 years and introduces a new, online procedure for incorporation. In addition, it applies most of the advantages previously attributable to innovative startups to a broader category of companies of innovative character, regardless of their maturity stage and size: innovative SMEs. 

December 2016: the 2017 Budget Law introduced several new policies to support innovative entrepreneurship and to bolster the attraction of foreign investment. Many of these measures adopt the policy guidelines of Italy’s new national plan for digitized manufacturing, Industria 4.0. In particular, the rate of the tax incentive for investors in innovative startups, originally set to 19% of the sum invested, was raised to 30% for both individuals and companies, effectively becoming the most generous incentive of its kind in the EU. The plan also introduces a “hyper-depreciation” scheme on capital goods of a high technological value: companies may increase the acquisition costs for accounting purpose by 150%, which practically results in a large tax deduction over several years. 

April 2017: a new two-year “investor visa” to reward non-EU citizens who invest substantial amounts in the strategic assets of our country, with especially favourable provisions for investors in innovative startups 

2018: the Italian Stock Exchange Authority clarified the use of equity crowdfunding for innovative startups through its regulation 

December 2018: the 2019 Budget law introduced new measures aimed at startups including the National Innovation Fund which contains 9 operation funds that have supported 116 startups through €273.3 in deliberated capital.  

What impact has been measured?

According to the legislation, the main metrics to be assessed are the impact of the policy on economic growth, employment and innovation. Every year, the Ministry issues a detailed report on the progress and the effects of the legislation dedicated to innovative startups. The latest edition (2021) can be found here.  

According to the annual report, the economic performance of innovative companies recorded very positive results in 2020 and early 2021. The number of innovative com.5%) panies grew, reaching around 14,000 startups (+16.8%) and 2,066 innovative SMEs (+15at the end of September 2021. Employment within these firms increased by 40.5% on the previous year demonstrating a serious contribution to overall employment in Italy. Overall production stood at just under €1.5 billion (approx $1.6 billion) in 2020 with an annual increase of 25.2%.  

The Italian Startup Act has also been built upon with several other policies favouring startups since 2012 including the Decree on Labour and the Investment Compact both in 2015, and the Budget Law for 2017. The annual report does not distinguish between the overall contribution of each piece of legislation so we cannot assess from this the direct impact of the Startup Act on the economy. However, it could be argued that the Startup Act paved the way for the subsequent pieces of legislation.  

Furthermore, independent analysis in 2021 has shown that the Italian Start Up Act has had a direct positive impact for startups by easing firms’ access to equity and debt capital. In particular they found that the tax benefits for new equity investors had alleviated the shortage of risk capital. The legislation was also found to contribute to access to bank loans for small and young enterprises. The report also estimated that the tax incentives had produced 900 jobs through young innovative companies that would have not otherwise existed, at a cost of €29 million lost revenues over the period of 2013-2015.  

Other tangible areas of impact include reduced costs for startups with the Ministry of Economic Development estimating the yearly red-tape savings amount to 525 euros for the first year of operation and 435 for successive years for the average startup. Data from the Revenue Agency also showed that investment in startups increased from €28 million (approx $30 million) in 2013 to €51 million (approx $55 million) in 2014.  

What lessons can be learned?

The Italian Startup Act is widely seen as substantial and transformative piece of legislation which has reshaped the startup scene in Italy and influenced similar pieces of legislation around the world, including in Spain, Brazil, the Philippines and Nigeria. The success of the legislation has also paved the way for successive governments to implement more policies aimed at benefiting entrepreneurship, suggesting that it has had a lasting cultural impact on policymakers.  

The legislation has not been without critique, with research in 2018 suggesting that in terms of the intensive margin, the policy has not yet produced good results. Aggregate VC funding has not increased and policy incentives seem to be creating a dual market for start-ups where lower quality startups are registering for guaranteed loans instead of refining their product and securing VC networking and mentorship. The research also notes that funding has not reached European average.  

Notes + Additional Context

Executive summary of the Italian Startup Act (in English): http://www.mise.gov.it/images/stories/documenti/Executive_Summary_Italy_Startup_Act_02_05_2016.pdf

Summary of the key elements of the policy, in ppt form (in English): http://www.mise.gov.it/images/stories/documenti/Slides_innovative_startups%20ENG_website_02_05_2016.pdf

2015 Report to the Parliament on the implementation of policies in support of innovative startups and SMEs (in English): http://www.mise.gov.it/images/stories/documenti/Relazione_Parlamento_startup_e_PMI_innovative_2015-ENG_01_03_2016.pdf

Official website of the Italian Chambers of Commerce for innovative startups: http://startup.registroimprese.it/index_en.html

 

 

CURATED BY

Mattia Corbetta

member of DG for Industrial Policy, Competitiveness and SMEs
Italian Ministry of Economic Development
Italy