On November 3, the Congress of Deputies approved the Draft Law on the Promotion of the Startup Ecosystem, better known as the Startup Law. It was finally enacted on December 21 and took effect upon its publication in the Official State Gazette (BOE) the following day. This law has the following main objectives:
– Creation and growth of innovative, knowledge-based, digitally driven, and fast-growing companies (hereinafter referred to as “startups”).
– Attracting talent and investment by creating favorable ecosystems.
– Attracting specialized investors or “business angels.”
– Fostering the development of hubs in outlying cities as well as in rural areas.
– Promoting investment in innovation, leveraging available public support instruments, and strengthening public-private partnerships
It is important to note that in order to benefit from the provisions of this law, it will be mandatory—as an essential requirement—to obtain the “startup” designation issued by the National Innovation Agency SME S.A. (ENISA).
This agency will assess whether the company meets all the requirements: being newly or recently established, being independent, having its registered office or permanent establishment in Spain, having at least 60% of its workforce in Spain, being innovative, not being publicly traded or having distributed dividends, and having annual revenue of no more than ten million euros.
Given the need for legal provisions that adapt the current reality to the intrinsic characteristics of these companies, the bill introduces a series of new provisions in the areas of tax, commercial, civil, and labor law, which will be analyzed from three perspectives: that of the startup itself, that of the employee, and that of the investor.
Startups will enjoy significant tax and legal benefits
As we noted in the introduction, the company must apply for startup status. Once the application is submitted, ENISA will have a maximum of three months to grant the corresponding certification; if it does not issue a decision within that period, the administrative silence will be deemed a positive decision.
Once ENISA issues the authorization, the startup will be entitled to the following incentives:
First, a reduction in the corporate income tax rate from the current 25% to 15%, for a maximum of four years starting from the first fiscal year in which the taxable income is positive, provided that the company maintains its status as a startup, bearing in mind that after five (or seven) years, the startup will no longer be eligible for the benefits of the law. Second, the startup’s general meeting may authorize the acquisition of treasury stock up to a maximum of 20% of the capital, for the sole purpose of implementing a compensation plan.
Third, all corporations are subject to dissolution due to losses when such losses reduce their net worth to an amount less than half of their share capital. The bill introduces a new provision stating that startups will not be subject to such dissolution until three years have elapsed since their incorporation.
Attractive incentives for employees to attract talent
With the aim of attracting talent and providing an attractive and appropriate compensation policy, the tax treatment of the regime known as stock options has been improved. The tax exemption limit, which was 12,000 euros, has been raised to 50,000 euros per year. In fact, and as a significant new development, under the new regulations, taxation will be deferred until the gain from the stock options is realized and liquidated or, if that is not possible, ten years after the shares or equity interests are granted.
Furthermore, with the aim of attracting foreign talent, this bill improves access to the special personal income tax regime for workers posted to Spain: it reduces the number of tax years prior to the posting to Spain during which the taxpayer cannot have been a tax resident in Spain, from ten to five years.
In addition, workers covered by the Special Social Security Regime for Self-Employed Workers (RETA) who exercise effective control over a startup and who are also employed by another employer will receive a 100 percent reduction in their RETA contributions for three years.
Improvements to Tax Deductions for Domestic and Foreign Investors
The tax deduction for investments in new or recently established companies is being increased, raising the deduction rate from 30 to 50 percent of the amounts paid for the subscription of shares or equity interests and raising the maximum base from 60,000 to 100,000 euros per year.
In addition, the time limit for claiming this deduction on the purchase of shares or equity interests is generally extended from three to five years, counting from the entity’s incorporation, and up to seven years for certain categories of startups, such as those in the biotechnology, energy, or industrial sectors.
Tax incentives are provided for the performance-based management of venture capital firms
On the other hand, if the investment in startups is made through an investment fund, there will be a team of people responsible for managing that fund. It is very common for them to be compensated with a performance fee (carried interest), in addition to other types of fees.
In line with regulations in neighboring European countries, the tax treatment of compensation earned for successful management is regulated. In this regard, carried interest will be considered income from employment. However, a 50% tax credit will apply, with the aim of aligning the tax treatment with that of neighboring countries.
In conclusion, the passage of this law marks a decisive step forward in a sector that has been calling for specific regulation for years, especially considering that Spain ranks fourth in Europe in terms of the number of startups, with 11,100 companies employing 140,000 people, according to the PwC report “The Socioeconomic Contribution of South Summit in Spain.”
Alberto López Cazalilla, Attorney at ELZABURU