Risk Finance

Risk Finance - State Aid Uncovered SM posts 5

Risk finance aid in the form of tax relief based on the GBER must be limited to private investors.


Decisions of the European Commission authorising aid for risk finance are very rare. This is the consequence of the success of the Commission to get Member States to use almost exclusively the General Block Exemption Regulation [GBER] for the design and implementation of their State aid measures.

However, occasionally Member States need to go beyond the confines of the GBER. This recently happened in the case of a Cypriot measure that was initially based on the GBER, but when it was revised it had to be individually notified to the Commission.

In January 2017, Cyprus transmitted to the Commission summary information about an aid scheme that was based on Article 21 of the GBER concerning risk finance. The scheme was registered under the number SA.47390.

The GBER-based scheme offered tax incentives until 31 December 2019 to natural persons, acting as private investors, to inject funds in innovative SMEs.

In May 2021, Cyprus informed the Commission of a new aid scheme to succeed the GBER-based scheme. But unlike the previous scheme, the new scheme was open not only to natural persons but also to corporate investors.

Article 21 [(3) & (13a)] of the GBER allows aid in the form of tax relief only to private investors who are natural persons. For this reason, the Commission requested the Cypriot authorities to make a full notification and, in the end, it approved the scheme with number SA.63127 on the basis of the Risk Finance Guidelines.[1]

The objective of the new scheme was the same as with the previous scheme: to offer tax incentives to natural and legal persons to provide risk capital to eligible innovative SMEs in Cyprus. In view of the prevailing very low interest rates, investors were to be tempted to assume more risk in order to earn more than what bank deposits could offer.

The tax incentive works as follows. Investors can deduct 30% of the amount they invest from their taxable income. The tax relief is subject to two ceilings: It may not exceed 50% of taxable income and the amount that is deducted may not exceed EUR 150,000 per year. The investment has to be in the form of equity that must be held for at least three years. Buy-outs and investment in export activities are not eligible.

Innovative SMEs are defined in the same way as in the GBER: They are those that spend at least 10% of the total operating costs on R&D. In addition, an SME can be classified as innovative if it has been awarded funding from certain EU programmes such as Horizon Europe, or it has received a Seal of Excellence or it has been granted aid under one of the national programmes that support innovation.

Existence of State aid

Since Article 107(1) TFEU applies only to undertakings, the tax incentives that benefit private investors who are not undertakings fall outside the scope of State aid rules. Therefore, the Commission decision concerns only tax relief for the benefit of investors who are undertakings.

In the connection, the Commission recalled that “(34) where a shareholding only gives rise to the exercise of rights attached to the status of shareholder as well as, if appropriate, the receipt of dividends, which are merely the fruits of the ownership of an asset, the investor will not be considered an undertaking if it does not itself provide goods or services on a market. In contrast, insofar as the tax relief is provided to private investors who are undertakings, it constitutes State aid to those investors within the meaning of Article 107(1) TFEU. This is notably the case where private investors are business angels or individual venture capital investors, who manage their investments and in that capacity act as undertakings.”

In other words, a natural person who invests in a company becomes an undertaking when it is involved in the day-to-day management of that company or offers advice and guidance to the managers of the company.

With respect to the recipients of the investments – i.e. the innovative SMEs – the Commission noted that “(37) the income tax relief incentivises investors to commit capital to innovative SMEs. As a result, the target undertakings obtain an advantage in that they receive better access to capital than they would have in the absence of the measure. That advantage is selective in nature because only the eligible undertakings may benefit from such investments. The eligible undertakings obtain an advantage, regardless of whether the investor is an undertaking or not.”

All the other criteria of Article 107(1) TFEU were also satisfied. Therefore, the notified scheme constituted State aid.

Compatibility of the aid

First the Commission pointed out that “(41) the measure does not fall entirely within the scope of Article 21 of the GBER, since that provision does not allow granting risk finance aid in the form of fiscal incentives to corporate investors. The Commission will therefore examine whether the new Scheme, given that it falls outside the scope of the GBER due to its design parameters (see paragraph 33(d) of the Risk Finance Guidelines), may be deemed compatible on the basis of the TFEU.”

Although the scheme was notified under the 2014 Risk Finance Guidelines, the Commission assessed it on the basis of the 2021 Risk Finance Guidelines [RFG]. This is because the previous Guidelines expired at the end of 2021 and because the aid was intended to be awarded after 1 January 2022.

The next step of the Commission was to confirm compliance with the formal criteria of the Guidelines as follows:

  1. No aid to large enterprises [paragraph 23 of the RFG].
  2. No aid to listed companies [paragraph 24 of the RFG].
  3. No aid without involvement of private investors [paragraph 25 of the RFG].
  4. No aid without appreciable risk for private investors, and/or where the benefits flow entirely to private investors [paragraph 26 of the RFG].
  5. No aid for buy-outs [paragraph 27 of the RFG].
  6. No aid to undertakings in difficulty, or undertakings subject to an outstanding recovery order [paragraph 28 of the RFG].
  7. No export aid [paragraph 29 of the RFG].

Then, the Commission examined compliance with the general compatibility conditions.

Condition 1: The aid facilitates the development of an economic activity

Identification of the supported activity: The objective was the development of innovative SMEs.

Incentive effect: In this connection, paragraph 47 of the RFG explains that “once the need for State intervention has been properly identified and the measure has an appropriate design, it can be assumed that an incentive effect is present”. “(55) The Commission notes that by improving the investment returns for the investors via the tax relief, the new Scheme encourages investors to make risk finance investments which they would not have made without the incentives. At the same time, however, the new Scheme still provides for investors to be sufficiently exposed to the future performance of their investments, thereby encouraging them to make efforts to find the investments with the best risk/return characteristics.” “(56) Since the measure addresses a market failure (as further established in recitals (58) – (70)) and is appropriately designed (as demonstrated in recitals (71) – (84)), the Commission concludes that the requirement that it has an incentive effect is respected”.

Condition 2: The aid does not adversely affect trading conditions to an extent contrary to the common interest

Need for state intervention: According to paragraphs 53 and 54 of the RFG, “State aid can only be justified if it can bring about a material development that the market cannot deliver itself […] and may be necessary to increase the provision of risk finance in a situation where the market, on its own, fails to deliver an efficient outcome or does not deliver in a timely manner.” “(59) The Cypriot authorities submitted a series of studies and reports – amounting to an ex ante assessment – in order to provide evidence demonstrating a specific market failure, which the new Scheme is designed to address in a targeted way.”

Appropriateness of the aid: “(73) The selection of a fiscal incentive as the most appropriate measure is part of Cyprus’ policy objective to offer a healthy and balanced ecosystem of various risk finance options in the market.” “(74) In addition, the ex ante assessment provides evidence regarding the financial sector’s continuous difficulty to provide for the demanded equity finance and the limited venture capital and business angel funding for innovative SMEs in Cyprus. The scarcity of supply of alternative sources of financing to debt financing is thus sufficiently demonstrated.”

Proportionality of the aid: According to paragraphs 132 to 134 of the RFG, “State aid must be proportionate to the market failure which it is intended to address in order to achieve the relevant policy objectives […] [and] the aid must be limited to the strict minimum necessary to attract funding from the market to overcome the market failure […] without generating undue advantages”. The Commission found the aid to proportional because the tax relief was capped by two ceilings and investors were exposed to risk.

Avoidance of undue negative effects on competition and trade

Paragraph 161 of the RFG stipulates that for aid to be compatible, “the negative effects of the aid measure in terms of distortions of competition and impact on trade between Member States must be limited and must not outweigh the positive effects of the aid to an extent that would be contrary to the common interest”.

The positive effect of the aid measure was the increased access to risk finance for innovative SMEs.

With respect to possible negative effects of the aid, the Commission noted that “(97) the income tax relief does not reduce any other incentives for private investors to provide funding to eligible undertakings as it acts in a complementary way to other financing incentives, nor does the income tax relief replaces the normal business risk of investments that investors would have undertaken even in its absence. Taking account of the demonstrated market failure, the Commission considers that it is less likely that the income tax relief will result in the crowding out of private investors. Therefore, the measure meets the criteria laid down in paragraph 169 of the Risk Finance Guidelines.”

“(99) Further, at the level of the final beneficiaries, the measure does not seem to have distortive effects on the product markets where the eligible undertakings compete as it is not sector-specific. Nor, does it give preference to certain sectors over others, and it therefore meets the criteria laid down in paragraph 174 of the Risk Finance Guidelines.”

Balancing of the positive effects against the negative effects of the aid

“(101) The Commission notes that, as regards competition distortions at the level of the investors, the measure targets a well-defined market failure, which substantially reduces the risk of crowding out. Private investors are still incentivised to focus on the performance of their investments, the risk investment amounts per undertaking are not excessive, as there is a maximum percentage of the tax relief to be provided in relation to the invested amount and a second overall cap in relation to the maximum amount that such relief can provide as a deduction from the taxable income of such investors, and the measure targets a specific category of SMEs (as opposed to mid-caps and large undertakings).”

“(102) In addition, as regards competition distortions at the level of the target undertakings, the measure explicitly excludes undertakings in difficulty and focuses on innovative SMEs (recital (12). The new Scheme is thus targeted at growth-oriented undertakings which are unable to attract an adequate level of financing from private resources but may become viable with risk finance aid. The nature and conditions of the tax relief incentivises private investors to make a selection of the eligible undertaking they will invest in, based on a commercial logic, as they bear the biggest part of the risk of such investment.”

“(103) In light of the foregoing, the measure can be considered to be designed in such a way so as to limit the distortion to competition and minimise undue advantages and its positive effects may be considered to outweigh any potential negative effects on competition in the internal market.”

Cyprus also committed to “fulfil the transparency requirement” specified in section 3.2.6 of the RFG.

On the basis of the above analysis, the Commission concluded that the scheme was compatible with the internal market.

[1] The full text of the Commission decision can be accessed at:

SA_63127_E0F19C7F-0000-C66B-BE35-8BE65E8B8DC3_23_1.pdf (europa.eu)




Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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