On 6 July, the Cabinet approved the Draft Law that seeks to promote start-up companies ecosystem. The Draft Law aims to support the creation and relocation of start-ups in Spain and continue to attract talent and international capital to develop an entrepreneurial ecosystem with an innovative vocation.
The Draft Law that seeks to promote start-up companies ecosystem (the "Draft Law") is part of the measures included in the Digital Spain 2025 agenda and is one of the milestones included in the Recovery, Transformation, and Resilience Plan.
In light of this, the Draft Law provides a regulatory framework that aims to stimulate investment and the attraction of talent in Spain, avoiding the talent drain, encourage collaboration between SMEs, large companies and start-ups, promote innovative public procurement with start-ups in the Administration, foster the collaboration of start-ups and entrepreneurs with universities and research centres and eliminate the existing gaps in the start-ups ecosystem.
With regard to the scope of application, the Draft Law is aimed at start-ups, which are newly created companies and limited liability entrepreneurs seeking to make an innovative idea profitable in order to launch new products or services, improve production or distribution processes, marketing, or the relationship between customers and suppliers.
The requirements for companies to qualify for this type of benefits are that such companies: (i) must be newly created or with a maximum "life" of five years since its incorporation (which may be extended to seven years in the case of the biotechnology, energy or industrial sector); (ii) must not have arisen from a merger, spin-off or transformation; (iii) must have their registered office or permanent establishment in Spain; (iv) must have a majority percentage of the staff with a contract in Spain; (v) must have an innovative character, which must be accredited each year by ENISA; (vi) must not be listed in the Stock Market or have distributed dividends; and (vii) must not have a turnover of more than five million euros.
In order to achieve its general objectives, the Draft Law develops a series of tax incentives which are:
- The tax rate for Corporate Income Tax ("CIT") and Non-Resident Income Tax ("NRIT") is reduced from 25% to 15% in the first tax period in which the taxable income is positive and in the following three periods, provided that the company maintains its status as a start-up company (note that this status cannot exceed a period of 5 or 7 years).
The practical application of this measure seems to be limited, since start-ups in many cases make losses in their first years of operation and would cease to qualify as start-ups precisely in those years in which they are most likely to start making profits. In addition, those companies that make profits within the 5 or 7-year period will have to choose whether to advance the taxes at a reduced rate or to offset their tax losses.
Additionally, the reduction of the CIT rate does not appear to have been intended for many taxpayers since a company will cease to be a start-up when it exceeds an "annual turnover" of 5,000,000 euros.
- The company is allowed to defer payment of CIT and NRIT without providing a guarantee and without a late payment interest during the first two tax periods with a positive taxable base, respectively, for a period of twelve and six months.
- There is no obligation to make advanced instalments of CIT and NRIT payments in the two years following the year in which the taxable base is positive.
As mentioned above, the measures seem limited. It is difficult to determine whether many start-ups will accrue CIT during their first 5 or 7 years.
- The tax treatment of employees' stock options is improved, as the tax exempt amount is increased from 12,000 to 45,000 euros per year in the case of shares delivered by a start-up company as result of the exercise of such stock options. In this case, the offer does not need to be made under the same terms and conditions for all the company's employees; it is sufficient for the request to be made as part of its general remuneration policy and contribute to employee participation.
- The Beckham Law (a special tax regime for people who move to work in Spain) is improved. In this sense: (i) the tax periods, in which the taxpayer has not been a tax resident in Spain are reduced from ten to five; (ii) the years during which tax can be paid under this regime are extended from five to ten; and (iii) the regime can be extended to the spouse and children under the age of 25 (or of any age with a disability) of a person who has moved to Spain for work, provided that the sum of the taxable bases is less than that of the main “impatriate”. (In relation to these measures, it must be noted that they would be generally applicable. That is to say not only in the context of start-ups).
- The personal income tax deduction for investments in new or recently created companies is amended by increasing the following items: (i) the deduction base from 60,000 euros to 100,000 euros per year; (ii) the deduction rate from 30% to 40%; and (iii) the period in which the company can be considered as newly created from three to five years, generally speaking, or up to seven years for companies in specific sectors.
The Draft Law also contains a series of improvements in administrative procedures. In this regard, it is worth highlighting:
- The obligation to obtain a Foreigners' Identification Number ("NIE") for non-resident investors is removed, requiring only that they and their representatives obtain a Tax Identification Number ("NIF").
- The procedures for the winding-up of the start-up's activity have been streamlined and such procedures will be completed electronically.
- Also a specific visa for international teleworking has been created and it will be valid for a maximum of one year, to favour the installation in Spain of the so-called "digital nomads" (nationals of a third country, who are highly qualified and can prove that they are graduates or postgraduates from universities, vocational training, and business schools or, who have at least three years professional experience and who work in Spain for companies located outside the country through the exclusive use of a computer, telematic and telecommunication means and systems).
Finally, the government has also announced that it is promoting the creation of controlled environments (sandboxes), for limited periods, to evaluate the usefulness, feasibility and impact of technological innovations in the different sectors of productive activity.
As pointed out, the Draft Law could have been more ambitious in its scope and in the extent of the tax benefits it purports to grant, as the practical of such benefits seems to be limited. It is worth noting that the legal drafting seems defective and lacks precision. For example, the Draft Law refers to the concept of an "annual turnover" instead of referring to the well-known and legally defined concepts from other legal texts.
Tax professionals and taxpayers can only hope that the proposal will be improved, both in form and content, during its parliamentary procedure.