What tax incentives exist in your jurisdiction to encourage fintech investment?
Fintech (2nd edition)
The Federal Government has created a “tax shelter” to foster start-up investment. Under certain conditions, investors may benefit from a tax reduction ranging from 30% to 40% on their invested amounts.
Increased tax deductions are also organised to favour investments in digital assets allowing for the integration and exploitation of electronic means of payment and invoicing, as well as in systems increasing IT and communication security.
A company establishes tax residency when it is incorporated in Bermuda. However, exempt undertakings (that is, entities that are not local or Bermudian owned) are eligible for the tax exemption certificate. The certificate is an assurance from the Minister of Finance that for the period up to 31 March 2035, an exempted undertaking is not liable to pay certain taxes. These taxes are any taxes:
- imputed on profits or income;
- computed on any capital asset, gain or appreciation; or
- in the nature of estate duty or inheritance tax.
Any business with employees physically based in Bermuda, whether local or exempted, is subject to Bermuda's consumption tax regime (whether or not they have an exemption certificate) which includes payroll tax.
There are no tax incentives in the Brazilian jurisdiction to encourage fintech investment.
At the moment in Chile, there are no tax incentives to promote Fintech investment. Investments in Fintech are treated like any other type of investment.
In the United States, there are no widespread tax incentives tailored specifically to technology in the financial sector, such as distributed ledger technology. However, the United States has tax incentives designed to encourage innovation at the federal, state, and local levels. For example, technology innovators may be entitled to the Research and Development Tax Credit (R&D Credit), which provides tax credits for research and development expenses incurred by technology companies. Similar credits also exist in major jurisdictions like New York, which gives tax credits to qualified emerging technology companies based on their expenses. California designed its R&D Credit based on the federal R&D Credit, but it is only granted for activities conducted in California. Fintech companies may also take advantage of tax incentives designed generally for emerging companies or companies that are significantly expanding their business.
Although China does not have tax incentives specifically for fintech, China has adopted tax incentives, subsidies, incubation funds, tax refunds and other preferential government policies for high-tech companies and certain FIEs. A ‘high-tech company’ recognized by the government is entitled to a variety of preferential policies, including (i) a reduced enterprise income tax rate of 15% (compared to the normal rate of 25%), (ii) an exemption of income tax on assignments of non-exclusive licences with a term of five years or more for the first RMB 5 million received from the licence, and a 50% reduction in the income tax to be paid on the amount received from the licence in excess of RMB 5 million; (iii) the allowance of accelerated depreciation of certain fixed assets; and (iv) government subsidies paid to the company and employees hired by the company. In addition, the government provides a temporary waiver of enterprise income tax (EIT, usually at 10%, unless a preferential tax rate applies under a double tax treaty or arrangement) for non-tax-resident enterprises (i.e., foreign investors) that make direct investments in projects and fields for which foreign investments are not banned, with profits distributed by a tax-resident enterprise in the PRC (Tax Deferral), if certain conditions are met.
Whilst not specific to fintech, there are a number of generous tax incentives in the UK aimed at promoting investment in small companies by “business angels”.
The first is the Seed Enterprise Investment Scheme (SEIS), which was introduced in April 2012 to help small, start-up stage companies, raise funds through individual investors by providing very generous tax relief to investors who take risks on such ventures. If an investor invests up to £100,000 per year in SEIS investments, for a stake in a company of less than 30%, income tax relief of 50% of the amount invested is given with the potential to split the relief between the tax year of the investment and the previous tax year. There is also no capital gains tax on the disposal of shares if the shares were held for at least three years. Loss relief is available; however, the relief is reduced by the income tax relief claimed on the investment.
The second is the Enterprise Investment Scheme (EIS), which was launched in 1994 to encourage individual investments in small unquoted trading companies in the UK. For this to apply, individual investors can invest up to a maximum of £1,000,000 per year, for a stake of less than 30%, and income tax relief of 30% of the amount invested is given. Again, there is no capital gains tax on the disposal of shares if the shares were held for at least three years; loss relief is available, but the relief is reduced by the income tax relief claimed on the investment and can be set against the investor’s capital gains or his income in the year of disposal.
The third is Entrepreneur’s Relief. This applies a 10% rate of capital gains tax to gains accruing on the disposal of ordinary shares in an unlisted trading company held by individuals, that were newly issued to the claimant and acquired for new consideration on or after 17 March 2016, and have been held for a period of at least three years starting from 6 April 2016.
One further tax incentive that is likely to be relevant to fintechs is R&D tax relief. This provides enterprises with a significant tax saving in respect of qualifying expenditure incurred by the enterprise on research and development projects which seek to achieve an advance in overall knowledge or capability in a field of science or technology, through the resolution of scientific or technological uncertainty. For a company with fewer than 500 employees that either has an annual turnover up to €100 million or a balance sheet of up to €86 million, the tax relief on allowable R&D costs is 230% - that is, for each £100 of qualifying costs, the company or organisation could have the income on which corporation tax is paid reduced by an additional £130 on top of the £100 spent. A loss-making company of this type could surrender its loss to HM Revenue & Customs for repayment as cash credit: for example, if a loss-making company carries on R&D and incurs a surrenderable loss of £100,000 in an accounting period, it could surrender the loss and receive £14,500 back from HMRC in cash. As such, a fintech that that is carrying out significant amounts of research and development could benefit greatly from this relief.
Until 2021, fintech companies may be eligible for a 7 year income tax exemption if they qualify with certain criteria including, amongst others: (a) exclusive corporate purpose must be the development of value added technology industries, (b) main activity must be software planning, analysis, design, programming or testing or IT consulting and administration, (c) minimum investment (aprox. USD 50.000 and job creation commitment, (d) income of less than COP 2.741 mm. Also, tech companies may also be eligible for tax credit and accelerated deduction on investments carried out in IT.
The UAE is considered attractive to businesses in terms of taxation. There are no tax incentives specifically directed at the fintech sector, however the UAE generally imposes little taxation with no corporate income tax but a value added tax of 5%. This value added tax applies to the provision of financial services where (1) such services are performed in return for an explicit fee, discount, commission, rebate or similar matter; and (2) the recipient of the services is a consumer residing inside the UAE, including the Financial Free Zones.
In general, companies and limited partnerships in Taiwan making investments may enjoy the general research and development (R&D) tax benefits, including tax credit of certain income tax liability for expenses incurred for R&D, and deduction of certain taxable income against R&D expenses. In order to encourage fintech investment, the FSC also promulgated internal guidelines with regard to the applications by the financial institutions for the aforementioned tax benefits.
No special tax-investment schemes with a focus on fintech are available in Denmark.
However, investments into R&D may be deducted for tax purposes, in the year in which the investments are made, or may be capitalized and subjected to accelerated depreciations. Furthermore, an investment incentive scheme has been introduced for R&D activities, under which the tax value of R&D deductions may be taken at the following – progressively increasing – percentages:
Tax value (measured in %)
Insofar as taxpayers elect to deduct borne R&D expenses in the income year in which they are incurred, that taxpayer may opt to have any tax loss paid out at the (corporate income) tax value of the expenses, i.e. 22% of incurred R&D expenses may be made payable to the taxpayer, under the tax credit regime.
Due to the lack of skilled workers in the fintech and IT-area in general, and due to the general high burden of taxation in Denmark, attractive tax-schemes have been made available to foreign scientists and high paid workers. If the worker fulfils the criteria, the worker will only be taxed 32.84 % for the first seven years of work, compared to the ordinary marginal tax rate of up to 56.5 %.
Lastly, a general investment scheme where natural persons can invest up to DKK 50,000 each year in shares, and only pay a yearly tax of 17 % of the yield compared to a tax of 27 % of the yield when the shares are sold.
Even though the scheme has not been around for long, it is not expected to have a significant influence on fintech investments or other investments in general due to the low yearly investment cap.
There are no tax incentives specially targeted at fintech investment. Switzerland remains overall a favourable business location from a tax perspective, with competition between cantonal tax regimes ensuring that the overall tax rate remains competitive. Token issuances are usually not subject to tax. Start-ups may profit from more lenient taxation in many parts of Switzerland, e.g. by being taxed only on net asset value until representative business results are available.
The Spanish Tax Administration Agency published, on 17 January 2019, the Annual Plan for Tax Control, which establishes the Agency’s top priorities for the current year.
In this Plan the Agency announces a study on Fintech in order to better understand this area of business and, therefore, avoiding a disconnection between the reality and its current procedures. With this study, the Agency expects to better serve the taxpayers.
Also, the Agency states that a similar study, with similar objectives, will be focused on e-commerce and new business models.
Finally, the Spanish Patent Box is a tax incentive associated with research, development and innovation that could be applied to patented inventions in the field of Fintech. This incentive is common throughout Europe and was created in order to align the system to the EU and OECD standards, which basically requires an effective link between the territory where the intangible asset is created and where the tax incentive is received.
There are no specific tax incentives for fintech. If, however, a fintech is involved in R&D, a recent bill of law provides for an income tax credit of up to EUR 500,000 per fiscal year on R&D related salaries and wages.
Up to date, there is no separate tax incentive (or plan therefor) for Fintech companies.
Currently there are no specific tax incentives to encourage fintech investment. There are however tax incentives available to fintech companies, which entail a specific tax deduction in relation to incurred research and development costs.
Even though we are not aware of any current tax incentive specifically aimed at encouraging fintech investment, there are tax incentives generally available to start-up investment which may be of importance considering that most of fintech investment is made through start-ups.
As an example, “Programa Semente” establishes that individual taxable persons who make eligible investments up to € 100,000 in start-ups can deduct 25% of the investment made up to a limit of 40% of the Personal Income Tax collection.
While the Income-tax Act, 1961 (Income Tax Act) does not exclusively provide for tax incentives to entities in the ‘FinTech’ space, a host of incentives/ benefits are available to ‘start up’ companies in general. The same benefits will be available to such FinTech start-ups which are recognised as ‘eligible start-ups’ under the Income Tax Act, subject to satisfaction of prescribed conditions.
(a) Conditions to be met by start-ups to avail incentives under the Income Tax Act:
Benefits are available to start-ups who qualify the below requirements (Qualifying Eligible Start-ups):
(i) It is incorporated on or after 01 April 2016 but before 01 April 2021.
(ii) Turnover of such Qualifying Eligible Start-ups should not exceed INR 250,000,000 (Rupees twenty five million) in any year for which such tax holiday is claimed.
(iii) Should engage itself in innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation (Eligible Business) and also hold a valid certificate of Eligible Business from the Inter-Ministerial Board of Certification.
(b) Key Benefits available to such Qualifying Eligible Start-ups:
(i) Tax Holiday under section 80-IAC of the Income Tax Act: Deduction of 100% of profits from Eligible Business is available to such Qualifying Eligible Start-ups for any 3 consecutive assessment years out of 7 assessment years beginning from the year in which such start-up is incorporated, subject to conditions prescribed in the said section.
(ii) Angel tax exemption: In case a closely held company issues shares to a resident and receives consideration in lieu thereof, which exceeds the prescribed fair value of such shares, the excess consideration is taxed in the hands of the company. In the context of start-ups, this levy of tax is popularly referred to as the 'angel tax'. The government has now clarified that such start-ups which are recognised by Department for Promotion of Industry and Internal Trade (DPIIT) and satisfy the conditions as prescribed by DPIIT, shall be exempt from the levy of the angel tax (refer notification issued by Ministry of Commerce (DPIIT) dated 19 February 2019.
The investment in FinTech business is recent in Peru. Currently, there are no tax incentives to encourage FinTech investment. In general, investors are subject to the general tax regime as any investor, whether national or foreign.
Even if there is no specific tax incentive applicable for investing in FinTech businesses, the Law of Income Tax in technological companies contemplates a special retention rate considerably lower (4.99%) than the general regime (30%) for loans originated from foreign countries, only if the requirements established in the law are fulfilled. This may encourage foreign investment in Peruvian businesses, although it is not specially designed for the FinTech industry.
In the same regard, it should be borne in mind that the financing of local enterprises (including enterprises with advanced technology businesses) through loans involves an interest expense, which is deductible to determine the benefit of the enterprise subject to income tax. A loan is more advantageous than a capital injection, since the latter does not allow the deduction of expenses for the distribution of dividends. This additional aspect must be taken into account by investors that are investing in IT companies.
The rule mentioned in the previous paragraph is applicable, as of 2019, only for companies with incomes greater than 2,500 Tax Units (approximately US$ 3 million) and provided that they comply with the requirements set forth in the Law of Income Tax.
There are no tax incentives in Israel designated to encourage fintech investments.
The are several tax incentives for R&D / innovative activity and to activities which may result in export activity, and those tax incentives can be used for fintech projects, if they qualify. Nonetheless, these incentives are not directed at fintech project and any project which meets the criteria may benefit from such incentives, regardless to its exact field of business.
Nonetheless, we believe that many fintech projects may qualify for the said tax incentives.
Please note that some tax incentives are contingent upon keeping the IP in an Israeli entity and keeping manufacturing activity in Israel.
Despite the numerous number of taxes and subsidies or grants, the Netherlands does not excel in incentivizing fintech companies, fintech investments or fintech projects via appealing tax rates. That being said, there are two tax related measures which could be used or applied for by fintech companies.
The first is a tax arrangement offered to an employer that employs specialist talents from abroad (who have lived more than 150 kilometres from the Netherlands for at least the preceding 16 months), such as programmers, blockchain experts and similar ‘Silicon Valley’ hotshots. An employer can pay up to 30% of the salary of its foreign employee on a tax-free basis for a limited period of 5 years. Given the relatively high income tax rates in the Netherlands (36.65%–51.75%, depending on income level), this facility is a welcome bonus for talent migrants.
The other tax arrangement worth mentioning is the Innovation Box. Innovative fintech research & development initiatives may be eligible for this tax arrangement. In essence it is a considerable discount on the corporate income taxes payable by a company. The current regular Dutch corporate income tax rates are between 19% (first €200,000 of taxable profits) and 25% (taxable profits over €200,000). These rates will be gradually reduced from 2021 to 15% and 20.5% respectively. Under the Innovation Box, only 7% taxes needs to be remitted in respect of the returns obtained from such innovative R&D (https://www.belastingdienst.nl/wps/wcm/connect/bldcontentnl/belastingdienst/zakelijk/winst/vennootschapsbelasting/innovatiebox/).
Currently no specific tax incentives accelerating fintech investment are granted in Japan. However, an individual angel investor can enjoy special treatment if he/she invests into new shares of a company that exists for less than 3 years and if certain requirements in relation to its size, cash flow deficit and amount of research and development ("R&D") expenses are satisfied. Further, some tax credit is available for R&D expenses, provided the company satisfies certain requirements determined based on its size.
Jersey is a low-tax jurisdiction and so there are no specific tax incentives for fintechs.
There are currently no specific laws regulating the taxation of cryptocurrencies or digital assets, although Jersey's Comptroller of Taxes has issued guidance on cryptocurrency tax treatment regarding income tax and GST treatment. The guidance shows that such assets will be taxed in accordance with general Jersey taxation principles and provisions.
There are no specific tax incentives for fintech companies in Liechtenstein. However, Liechtenstein has a very attractive tax regime in particular for enterprises. The corporate income tax rate is at 12.5%. Dividends and capital gains, derived from sales or liquidations of investments in shares or similar equity instruments, are generally not included in the taxable income of entities. Further, 4% of the corporate's equity capital can be booked as an expense in order to reduce profits, which means that the effective tax rate is below 12.5 %. In addition, it is possible to offset carry-forward losses for an indefinite period of time.
No special tax relief or incentives have been provided to further promote and develop Fintech investment in Mexico.
In general, Luxembourg has a competitive VAT and corporate tax landscape. Furthermore, Luxembourg offers an attractive environment for IP management, including an absence of withholding tax on royalty payments and an extensive network of double tax treaties. To encourage R&D activity, Luxembourg offers an attractive IP tax regime that provides for an 80% on the net income derived from eligible IP assets (principally copyright protected software and patents), as well as, a 100% exemption from net wealth tax.
While there is no specific tax incentive for fintech investments, the Malta Enterprise Act (Chapter 463) (‘MEA’) entails various incentives consisting of tax credits calculated either as a percentage of the capital investment which is typically utilised by capital intensive enterprises, or by reference to the value of wages covering new jobs created, consequent to an investment project. Tax credits are set-off against the income tax due by the enterprise for that year. The Micro Invest Scheme, one of the many tax incentives under MEA, grants eligible undertakings the possibility to claim a tax credit equivalent to 45 per cent of eligible expenditure and wage costs. Malta also provides for attractive tax residency rules for highly qualified individuals and high-net-worth individuals wherein a 15 per cent flat rate on income tax on particular income streams may apply to such individuals provided that certain requirements are met.
There are no tax incentives exist in Malaysia specifically for fintech investment. However, SMEs in Malaysia are given preferential tax rates as well as a wide range of tax incentives for businesses in the manufacturing, services and agriculture sectors. Fiscal incentives are pioneer status, investment tax allowance, reinvestment allowance, accelerated capital allowance and industrial building allowance, for example, pioneer status with income tax exemption of various percentages by the Malaysian Industrial Development Authority (“MIDA”).
Apart from the that, Multimedia Super Corridor (“MSC”) Malaysia status recognition by MDEC for information and communication technology (“ICT”) and ICT-facilitated businesses that meet specified criteria available to local and foreign companies. Specific incentives are granted to MSC Malaysia status entities, including the MSC Malaysia Bill of Guarantees, 100% exemption from taxable statutory income, 100% investment tax allowance, eligibility for research and development grants, and freedom to source capital and borrow funds under specific waivers from the foreign exchange administration requirements of Malaysia.
The tax authority in Singapore is the Inland Revenue Authority of Singapore (“IRAS”).
New start-up companies – including FinTech startups – in Singapore will be exempted from any tax on the first S$100,000 of the normal chargeable income (which will be reduced to 75% of the first S$100,000 from Year of Assessment 2020 onwards). Additionally, the company will be exempted up to 50% of tax on the next $200,000 normal chargeable income.
In addition, IRAS has further tax schemes such as the Productive and Innovation Credit (“PIC”) Scheme, and the Angel Investors Tax Deduction (“AITD”) Scheme, which both encourage FinTech investment. Under the PIC Scheme, eligible businesses may claim tax credits for expenditure on activities that involve innovation, such as the acquisition and leasing of IT and automation equipment. Under the AITD Scheme, an approved angel investor may claim a tax deduction after meeting several requirements.