Sun, sea and… startups!

Are cold, grey winters getting you down? Are you thinking about relocating to a warmer climate with great food and a lovely language? Do you want to take naps in the middle of the day and not feel guilty?

Then fear not – as of 1 January 2023, the Spanish government’s pioneering Startup Act and its tax developments came into force, being the first in Europe to specifically target the creation of an innovative, entrepreneurial ecosystem.

The Startup Act forms part of a series of new laws that the Spanish government has passed, which comply with measures, reforms and investments set out via the Recovery, Transformation and Resilience Plan, the aim of which is to boost Spain’s productivity, improve the business climate and create jobs.

Pablo Vera, director of public affairs at Kreab, clarifies: “The plan’s ultimate aim is to repair the damage to the economy caused by the Covid-19 crisis and to promote sustainable and digital business models. Spain will receive subsidies from the European Commission‘s budget of €150bn. Part of the commitment to the plan includes instating a structural and legislative roadmap, and the Startup Act is one aspect.”

The Startup Act also forms part of the Estrategia España Nación Emprendedora (Strategy for Spain as an Entrepreneurial Nation). This is an initiative that was presented in 2021, intended to promote investment, talent, scalability and public sector support for entrepreneurship.

The tax relief to come from the law will likely benefit Spanish GPs more than it does Spanish startups, but the incentive to invest should trickle down into the startup ecosystem over time. At least, that’s the idea.

Carried away
The Act encourages Spanish GPs to invest in startups because of the 50% exemption on carried interest.

David Miranda, partner at Osborne Clarke, shares more: “The Spanish government has approved that general partners of PE and VC firms will only pay personal income tax (PIT) on 50% of the carried interest. So, at the end of the day, the final tax rate will roughly be similar to the capital gains tax rate, which is about 27%. Although part of the Startup Act, it is important to note that individuals who are subject to PIT in Spain and are partners of PE or VC funds will be eligible for the 50% exemption on their carry regardless of whether they invest in startups under the law or mature companies.”

In short, investing in Spanish companies, large or small, unproven or established, will have hefty fiscal benefits for GPs based in Spain.

Making the move
You might be put off by the fact that you would have to move to Spain in order to gain access to these tax incentives. If so, the Spanish government has thought of you in its attempt to attract foreign professionals to the country.

In practice, workers, highly qualified individuals, entrepreneurs and investors, including their accompanying families, may choose to pay non-resident income tax (IRNR) during the tax period in which they change residency. This can be in place for the following five tax periods.

Professionals subject to IRNR will comply with a general rate of 24% of the tax base, with a maximum of €600,000. The amendment has been made in the same light as the Beckham Law, named after footballer David Beckham and introduced in 2004 to attract qualified workers (or famous football players) to Spain. 

Start me up
So, we’ve touched upon the benefits for GPs, but what is actually in it for the startups? The main benefits include:

• A reduced CIT rate of 15%. This has been lowered from 25%.
• A higher tax break of up to €50,000 for business angels who invest in startups. This is increased from a maximum of €18,000.
• Benefits to employees awarded with stock options. This means that the income generated from a stock option will not be taxed until whichever of the following scenarios comes first: the shares are sold by the employee or company IPO, or 10 years after the stock option was taken. Additionally, the first €50,000 of income generated from stock options is tax-free.

However, Osborne Clarke’s Miranda is a staunch critic of the Startup Act for the following reasons: “The reduction in the CIT rate is meaningless because most startups tend not to pay corporate income tax rate in their initial years as they do not make a profit. Also, the problem I see with the stock options scheme is twofold. Firstly, when the company ceases to qualify as a startup under the law (generally, five years after establishment), the employee no longer qualifies for the enhanced tax regime, which implies that, if the employee receives stock options, they will have to pay taxes with no deferral and no €50,000 exemption. Secondly, if the company eventually goes bankrupt or is liquidated (which is the final outcome for many startups), despite the shares being worthless, the employee will still have to pay taxes.”

What’s in a name?
A young, unproven company will not necessarily classify as a startup according to the Act. In essence, it defines a startup company as one that:

• Is less than five years old (or seven for certain strategic sectors)
• Is not listed on the stock market
• Does not pay dividends
• Has its headquarters or registered office permanently established in Spain
• Has 60% of its workforce in Spain
• Has a maximum turnover of €10m
• Is classified as ‘innovative’ in nature.

To obtain the classification of ‘startup’, ENISA (Spanish Public Innovation Company) is responsible for evaluating companies against the aforementioned seven criteria.

Ultimately, the law might prove tricky for emerging businesses as they may struggle to be classified or maintain their classification of a startup to enable them to access the tax benefits, notwithstanding the previously mentioned downsides. 

Still, if you are a GP craving an exotic escape, perhaps establishing a PE firm in Spain will provide you with the laidback lifestyle you are seeking. For Spanish GPs, the future looks bright.