The essential requirements of an innovative startup

April 23, 2021
Find out what requirements your business project has to meet.

Resource created by TORO Legal Hub

The origin of innovative startups

There are many stories of women and men who have demonstrated their ability to impact and change the society in which they lived, transforming their ideas into business. 

Today's world is strongly conditioned by an unprecedented rate of technological innovation and the legislature itself has found itself in the need to encourage other ways of doing business for a sustainable growth of the economy and the community, to facilitate youth employment and entrepreneurship. 

With the Crescita Decree of 2012 n. 179 converted into law on 17/12/2012 n.221 (so called Sviluppo Decree bis), was born for the first time in Italy the Startup Act, an ecosystem of rules that allow to derogate from the general provisions of the Civil Code and special laws and thus encourage the start-up and development of companies with high innovative potential. 

The startup is nothing more than a corporation and therefore: joint-stock company, limited liability company, limited partnership, cooperative society; with a highly innovative and technological core-business that benefits from a facilitated system in the following areas:  

  • administrative simplification
  • labor market
  • tax benefits
  • bankruptcy law.

In order to obtain registration in the special section of innovative startups, the company must meet mandatory and alternative requirements.

Requirements of the innovative startup

Art. 25 paragraph 2 from letter b) to g) of the Crescita 2.0 decree identifies the mandatory requirements that the company must meet cumulatively in order to be defined as an innovative startup, together with at least one of the alternative requirements identified in the following letter h). These requirements must be maintained and preserved by the company itself in order to acquire the qualification of innovative startup and therefore to benefit from the favorable regime provided for it. 

In order to qualify as an innovative startup, all the mandatory requirements must be met at the same time. i) registered office; ii) minimum production value; iii) prohibition to distribute profits; iv) corporate purpose; v) prohibition to set up through extraordinary operations; vi) date of incorporation. 

Registered office

As far as the registered office is concerned, the company must set up its headquarters in Italy for the entire duration of the tax period; or set up its headquarters in one of the member states of the EU or in states adhering to the Agreement on the European Economic Area, provided that it has a production site or branch in Italy. 

Value of the minimum annual production

Starting from the second year of activity of the innovative startup, the total annual production resulting from the last budget approved within six months from the end of the fiscal year, cannot be higher than five million euros, as established by art. 25, paragraph 2, letter d), Decree Law 179/12. The figure is the total of item A9 in the income statement pursuant to art. 2425 of the Italian Civil Code.

Prohibition to distribute profits

As governed by art. 25 c. 2, lett. e) the innovative startup cannot and must not distribute profits or have distributed them since the company was established. 

This mandatory cumulative requirement is imposed in order to encourage the investment of profits in research and development, to support the growth of the innovative startup. 

This is not an absolute prohibition but a limitation that operates until the company meets the requirements of an innovative startup. This prohibition remains in place for as long as the company meets the requirements and has the status of an innovative startup, up to a maximum of 5 years from registration in the Special Section of the Companies Register. 

Corporate purpose

As regards, instead, the corporate purpose, according to art. 25 paragraph 2 letter f) DL 179/12 the startup must have as its exclusive and prevalent corporate purpose the development, production and marketing of innovative products or services with high technological value. The innovative nature of the business activity is a requirement that must necessarily exist in order for the company to be registered as an innovative startup. 

It is important to include in the Articles of Association a wording that clearly shows that the company operates, at least predominantly, for the development, production and marketing of innovative products or services with high technological value, which must be identified and described. 

Like the activity actually carried out, the innovative activity carried out exclusively or prevalently cannot be of a "documentary" nature, that is, limited to the mere letter of the statute, but must instead be verified on the basis of the economic results actually achieved by the startup. 

When drafting the corporate purpose, it is necessary to take into consideration some formalisms that the legislator indicates to us. The elements and information that must be described in the corporate purpose - in order to identify the innovative startup - can be outlined as follows: 

1) operational phases of development production and commercialization; 

2) good/service object of the above mentioned operational phases; 

3) the innovative and technological properties and characteristics of the good/service that is the object of the enterprise or the innovative and highly technological ways in which the good/service is realized; 

4) the exclusivity or prevalence of the startup-innovative activity. 

If these formalities are not followed in the drafting of the corporate purpose, it is very likely that the Chamber of Commerce - during the registration phase - will send a notice to the depositor for correction. This inevitably implies a lengthening of registration times. 

Prohibition of incorporation through extraordinary transactions

According to art. 25 comm. 2, lett. g) DL 179/12 the innovative startup cannot be established as a result of extraordinary transactions, such as mergers, corporate splits, transfers of business or business units. 

The rationale for this restriction lies in the desire to prevent innovative startups from being originated by spin-offs, it is clear that startups must not constitute assets that have been spun off from other businesses that have already been started and therefore cannot derive from a merger or spin-off or from a business transfer. 

Date of Incorporation

Finally, the last mandatory cumulative requirement is the date of incorporation and, in particular, the company must not be established and have been in business for more than 60 months, or 5 years. Therefore, innovative startups can enjoy the benefits provided for within 5 years of their incorporation; once this period of time has elapsed, they have the possibility to transform themselves into Innovative SMEs, without losing the benefits available. 

Alternative requirements

In order to qualify as an innovative startup in addition to the possession of all the mandatory requirements just described, the company must possess at least one of the following alternative requirements pertaining to

i) research and development expenses (R&D costs); 

ii) the employment of highly qualified employeess; 

iii) the possession of at least one industrial patent.

Research and development expenses 

The first of the three alternative requirements according to current legislation concerns research and development expenses which must be equal to or greater than 15% of the greater value between the cost and total value of the production of the innovative startup as established by art. 25 paragraph 2, letter h) of DL 179/12 as amended by art. 9 paragraph 16 letter b). 

These values must be deduced from the financial statements of the company or, in the absence of financial statements in the first year of life, must be attested by a declaration of the legal representative if, on the other hand, at the time of registration in the special register of companies and in the subsequent stages of updating, the company opts for another alternative criterion, it must neither declare these expenses nor describe the related activities. 

As regards the procedure for calculating the 15% ratio, the first step consists in identifying the higher value between the cost and the total value of production. 

The cost of production corresponds to item B of the Income Statement represented pursuant to art. 2425 of the Italian Civil Code, whilst the value of production corresponds to the total of item A of the Income Statement. 

Employment of highly qualified personnel 

According to art. 25 paragraph 2 let. H) DL 179/12, amended by art. 9 paragraph 16 letter c) of DL 76/13, as an alternative to the requirement of research expenses, in order to qualify as an innovative startup the company can demonstrate that it employs as employees or collaborators for any reason: 

- in an amount equal to or greater than 1/3 of the total workforce, personnel in possession of a doctoral degree, or who are pursuing a doctoral degree at an Italian or foreign university or in possession of a university degree and who have carried out, for at least three years, certified research activities at public or private research institutes, in Italy or abroad; 

or 

- in an amount equal to or greater than 2/3 of the total workforce, personnel in possession of a master's degree pursuant to art. 3 of the Regulations pursuant to Ministerial Decree 270/04. 

According to Resolution No. 87/E of October 14, 2014 of the Italian Revenue Agency, in determining the percentage of highly qualified workforce, the calculation must necessarily be made "per head" and not on the basis of remuneration. 

Industrial patent 

The third alternative mandatory requirement, according to the Growth Decree 2.0. provides that the company that intends to obtain the qualification of innovative startup must be owner or depositary or licensee of at least one industrial patent relating to an industrial or biotechnological invention, a topography of a semiconductor product or a new plant variety. 

For what concerns here, following the changes introduced by the Labor Act, for the innovative startup it is possible to have also the ownership of rights relating to an original computer program registered at the special public register for computer programs, provided that these rights are directly related to the corporate purpose and business activity. 

Therefore, the registration of a program with the SIAE and, as specified below, the obtaining of rights of economic exploitation of a registered software by virtue, for example, of a contract conferring exclusive rights on the software itself, both constitute sufficient hypotheses to integrate the alternative requirement of the innovativeness of the startup. 

In conclusion, therefore, the numerous start-ups (established or to be established) that have developed on their own or have commissioned (by acquiring the economic exploitation rights from the software house or from the developer) the creation of original programs directly pertaining to the company's object and business activity are entitled, if the prerequisites are met, to request the registration of the program in the public register; the issuing of the registration certificate to the author or the legitimate user constitutes the existence of one of the alternative requirements prescribed by the reference legislation and, for the purposes of qualifying a startup as an innovative startup, this makes up for the complexities and limitations that characterize the potential patentability of software. 

On the profile of Industrial Privateness, two interesting opinions of the MISE are highlighted. 

According to the Opinion of August 22, 2014, no. 147532, the innovative startup that has already filed a patent even if pending registration, is registrable in the special section of the register of companies.  

While the Opinion of January 2, 2018, n. 513, the so-called ornamental models (design objects), although being an industrial property right regulated by the Industrial Property Code, do not fall within the definition of privative right recited by the discipline on startups and SMEs.

Author

Valerio Capasso
Founder TORO Legal Hub

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