Main tax measures included in Spain's Start-up Law

The Official Spanish Gazette has published (22 December) Law 28/2022 dated 21 December to foster the start-up ecosystem in Spain, also known as the new Start-up Law, which includes relevant tax measures.

Start-up concept

The specific requirements for these companies to be considered as start-ups are the same. Therefore, new technology-based and innovative companies will be considered a start-up:

• if they are newly created or have been in existence for up to five years (and up to seven years in the case of biotechnology, energy, industrial, and other strategic sectors);
• if they are independent;
• if they have their registered office, headquarters or permanent establishment in Spain;
• if at least 60% of their workforce is in Spain;
• if they have not distributed dividends and are not listed on a regulated market; and
• if they have an annual turnover of less than €10 million (the annual turnover set out in the Draft Law was of €5 million).

The National Innovation Company, which assesses the compliance with the requirements to qualify as a start-up, will have a period not higher than three months to issue a decision and may establish agreements with regional bodies to certify the condition of start-up. In the absence of an express resolution, the application will be understood as accepted by "positive administrative silence". 

The main tax incentives and benefits established by this Law affect Corporate Income Tax (IS), Personal Income Tax and Non-Resident Income Tax (IRNR). It should be noted that the measures relating to Personal Income Tax will enter into force on 1 January 2023.

Incentives for start-ups

IS taxation has been reduced and deferred for start-ups.

• A reduced rate of 15% is set for the first year, in which the taxable base is positive and, for the following three years, provided that the status of the start-up company is maintained.
• The possibility of requesting a deferral of the tax debt for the first two periods in which there is a positive taxable income for IS has been introduced, for a period of 12 and 6 months, respectively, without the need to provide guarantees and without accruing late-payment interest.
• In addition, an exemption from having to pay on account in the two years following the first two periods in which there is a positive taxable income is introduced, provided the condition of being an emerging company is maintained.

Incentives for investors

There will be higher personal income tax deductions and exemptions for investing in Spanish start-up companies and awarding shares or stock options to start-up business employees.

• The general Personal Income Tax deduction for investing in new companies (not necessarily Spanish start-ups) is increased from 30% to 50%, and the maximum deduction base is increased from €60,000 to 100,000. Additionally, investments may be made in new companies during the first five years of the company's life (until now, it was three years) or seven years for Spanish start-ups (certified by the National Innovation Company). 
• The exemption is increased to €50,000 per year for awarding shares or stock options to employees of Spanish start-up companies (until now, it was €12,000). This exemption applies irrespective of whether these shares or stock options are granted to all company employees under the same conditions: it is sufficient that they awarding is as part of the company's general remuneration policy. In the case that employees have previously been granted stock options, they may also benefit from this exemption when exercising these stock options (the requirements for consideration as an emerging company must be met at the time of granting the option and not at the time of delivery).
• Special valuation and imputation rules are introduced for non-exempt income from work in kind derived from the granting of such shares or the exercise of such stock options. Therefore, their imputation is deferred until the tax period in which specific circumstances occur (for example, listing on a regulated market of the emerging company) and, in any case, within ten years from the delivery of the shares. As regards their valuation, if during the year before the allocation of the return, there has been a capital increase subscribed by independent third parties, the subscription value of the capital increase will be the value used to value the shares of the start-up that have been delivered.

Additional incentives

There are a number of additional incentives for investors not conditional on an investment in an emerging company.

One of them is the regulation of the tax treatment of remuneration derived from the management of private equity entities ("carried interest").

• The carried interest obtained by directors, employees, or managers of certain closed-end collective investment funds and entities will be taxed as earned income but will be included in the Personal Income Tax base with a 50% tax allowance -subject to compliance with certain requirements- and will therefore be subject to taxation at an effective rate of approximately 23-27% (depending on the Autonomous Community of residence).

There are also improvements to the special inbound tax regime.

• The number of tax periods prior to relocating to Spanish territory during which a taxpayer may not have been a tax resident in Spain is reduced from 10 to 5 years.
• The application of the regime is extended to workers who move to Spanish territory to work remotely, using exclusively computer, electronic and telecommunications means and systems. In addition, the international teleworking visa replaces the obligation to have a posting order from the employer.
• Start-up directors may apply the special tax regime, regardless of the percentage of their stake in the company's capital stock. 
• A new case of application is introduced for entrepreneurs and highly qualified professionals.
• Taxpayer’s children under the age of 25 (or of any age if they are disabled) and spouse, can benefit from the regime. 
• Taxpayers who opt for this regime will be taxed under the IRNR and will have to pay Wealth Tax. However, there is no provision for taxation under other taxes, which could lead to conflicts when coordinating with the new Solidarity Tax on Large Fortunes.

Osborne Clarke comment 

The Start-up Law establishes a series of fiscal and legal incentives to boost the growth and prosperity of new or recently created companies and attract talent and capital. Although the core elements remain identical to the draft law approved by the Council of Ministers on December 10th 2021, the legal text was finally approved with some improvements, as noted above.

Hopefully, these measures will finally answer some of the most controversial issues in the investment field so far.