Global Tax Alert: Spain approves a favorable tax regime for startup companies and their investors and employees
Spain recently introduced Law 28/2022 of December 21, 2022, to promote the ecosystem for startups (Ley de fomento del ecosistema de las empresas emergentes). The law incorporates an important set of tax incentives for startup companies and their investors and employees.
In addition, the new law regulates, for the first time, the tax treatment of the carried interest as well as improves the special tax regime for inpatriates.
Tax incentives for startup companies and their investors and employees
The tax incentives apply to startup companies defined as companies established in the last five years (seven years in the case of biotechnology, energy, industrial and other strategic sectors) which perform innovation activity, and which are not listed on the stock market, have annual revenues up to EUR10 million , have not distributed dividends or profits since their incorporation, have a registered office or permanent establishment in Spain and 60% of the workforce is employed in Spain.
Companies seeking for the tax incentives must directly request certification of startup company from ENISA, a national institution under the Ministry of Industry, Trade and Tourism. The Spanish tax authorities may verify compliance with and maintenance over time of the requirements referred to above.
The tax incentives are as follows:
- Startup companies
The startup companies will benefit from a reduced corporate income tax rate of 15% in the first four years as of when their tax base is positive.
Moreover, the startup companies may request the deferral of payment of the corporate income tax debt corresponding to the first two fiscal years in which their tax base is positive for 12 months (first fiscal year) and 6 months (second fiscal year) with no guarantee provided and without interest accruing.
Finally, the startup companies will not be obliged to make partial payments of the corporate income tax during the two fiscal years after the company has a positive tax base.
To attract talent and to provide a remuneration policy appropriate to the needs of the startup companies, the taxation of the share-based and stock option plans has been improved.
For startup companies, the amount of the exemption increased from EUR12,000 to 50,000 per year. Unlike in the general regime, the application of the exemption does not require that the plan is offered to all of the employees, instead the plan simply must be part of the company's general compensation policy and contribute to the employees’ participation in the company. In addition, a special rule of imputation is established for income exceeding EUR50,000, which allows deferring the taxation of income derived from the share-based and stock option plan until the startup company is listed or the shares are transferred by the employee, and in any case, within a period of ten years from the acquisition of the shares by the employee.
- Business angel investors
To attract investment, the tax deduction for investments by individuals in new or recently created companies has been increased from 30% to 50% while the deduction base has been increased from EUR60.000 to EUR100.000. The period for making the investment has been increased from 3 to 5 years since the company’s incorporation and to 7 years for startup companies.
In accordance with the new tax regulations, individual investors in startup companies may benefit from a 50% tax relief up to a maximum of EUR100.000 if the shares are acquired at the time of the incorporation of the company or through a capital increase within 7 years since the incorporation, the equity of the company does not exceed EUR400,000 in the commencement of the fiscal year in which the shares are acquired, the shares are maintained for more than 3 and less than 12 years, and the participation of the investor does not exceed 40% (together with their relatives). Founders of a startup company are also eligible for this tax deduction regardless of their percentage of ownership.
For the first time, the taxation of the carried interest is regulated by law. Carried interest is expressly considered as salary income subject to Personal Income Tax (and therefore taxed at a maximum progressive tax rate in the range of 45% to 54%) whereby however only 50% of the income will be subject to tax because a 50% reduction will apply. The 50% reduction means that carried interest will be taxed at an effective maximum tax rate between 22.5% to 27%, meaning that the taxation of the carried interest has been brought in line with the taxation of the capital gains.
The 50% reduction only applies to carried interest from (i) closed-ended Alternative Investment Funds as defined in Directive 2011/61/EU, falling into any of the following categories: private equity entities regulated under article 3 of Act 22/2014, European venture capital funds, European social entrepreneurship funds and European long-term investment funds and (ii) other similar investment entities.
The application of the 50% reduction requires (i) the special rights of the carry shares are conditional upon the remaining investors obtaining a minimum guaranteed return as defined in the regulations or bylaws of the entity, (ii) the carry shares are maintained for at least five years and (iii) the special rights do not derive directly or indirectly from an entity resident in a country or territory classified as a non-cooperative jurisdiction or with which there are no regulations on mutual assistance for the exchange of tax information in place.
Special tax regime for inpatriates
To attract foreign talent, the special tax regime for inpatriates has been improved as well. In particular, the number of tax periods prior to the relocation to Spanish territory during which the taxpayer could not have been a tax resident in Spain is reduced from 10 to 5 years, thus simplifying access to the regime.
In addition, the application of the regime is extended to (i) individuals that move to Spain to work remotely exclusively through the exclusive use of computer, electronic and telecommunication means and systems or to carry out a business activity that qualifies as an entrepreneurial activity; (ii) highly skilled professionals that move to Spain to provide services to startups or carrying out training, research, development and innovation activities, for which they receive a compensation representing in aggregate more than 40% of their total salary or business income and (iii) the inpatriate’s spouse and children under twenty-five years of age if they meet certain conditions.
The special tax regime remains applicable to individuals that move to Spain to become directors of a Spanish company. The maximum participation restrictions have been eliminated, except in the case the entity is an asset-holding company, in which case, the director cannot have a participation equal to or more than 25%.
The new law places Spain at the vanguard in the development of an entrepreneurial ecosystem based on innovation, creation, and the relocation of emerging companies, attracting talent and international capital. Together with the tax incentives, the law removes bureaucratic obstacles and makes the procedures to create and invest in startups more flexible. It also contains important measures to attract international talent and recover domestic talent, encouraging the establishment of remote workers and digital nomads in Spain.