A review of the features of the Startup Law: what entrepreneurs should know.

This measure has been talked about for several years and finally came into effect on January 1, 2023, having been published in December 2022 in the BOE of Law 28/2022: "Promotion of the ecosystem of emerging companies", better known as Startups Law.

We make a brief review of the main characteristics of the Law that affects all our community. We will see what its objective is and how it can benefit us.

What is the Startup Law

One of the main novelties is the definition of "startup". The new regulation defines a startup as a company that meets a series of conditions, some of which are detailed below:

• not more than five years old (seven years for strategic sectors)

• that has its registered office or permanent place of business in Spain

• that develops an innovative entrepreneurial project with a scalable business model or that is not publicly traded and does not distribute dividends. 

• 60% of the workforce has an employment contract in Spain, or the annual turnover does not exceed 10 million euros.

What is the purpose of the Startup Law?

The law aims to promote investment in innovation, boost public instruments to support the start-up ecosystem and strengthen public-private collaboration in order to support the growth of these companies.

These are the general objectives:

• Encourage the creation, growth and possible relocation of new companies in Spain, also setting conditions that favor their internationalization capacity.

• Stimulate public and private investment in startups.

• To favor the interrelation between companies, financing agents and territories in order to increase their chances of success, with special attention to those established in rural environments, especially in areas that are losing population, in the interest of greater social and territorial cohesion.

• Attract international talent and capital for the development of the Spanish entrepreneurial ecosystem.

• Develop and promote the rapprochement between vocational training institutions, universities and emerging companies.

• To contribute to the exchange of knowledge from the University and public research organizations and other public agents of the Spanish Science, Technology and Innovation System to the business world.

• Eliminate gender gaps in the Spanish ecosystem.

• Support the development of poles of attraction for companies and investors.

• To guarantee the efficiency and coherence of the state system of aid for innovation-based entrepreneurship.

What the law implies 

The Startup Law incorporates tax measures, such as the reduction of the corporate income tax rate and the non-resident income tax rate, from the general rate of 25% to 15% in the first four years after the taxable income becomes positive.

It also provides for the increase in the amount of the tax exemption for stock options from 12,000 to 50,000 euros per year in the case of delivery by startups of shares or participations derived from the exercise of purchase options.

In addition, it also increases the maximum deduction base for investment in new or recently created companies (from 60,000 to 100,000 euros per year) and the deduction rate (from 30% to 50%).

Most important measures of the Startup Law

The following are some of the most important measures of the first European law specifically aimed at fostering an innovative entrepreneurship ecosystem that the High Commissioner for Spain as an Entrepreneurial Nation (ACENE) has promoted with the support and collaboration of the entire ecosystem.

1. Improvement in the tax treatment of stock options to compensate employees of start-up companies

The law establishes a series of improvements in the tax treatment of stock options, one of the key tools for attracting and retaining talent, as it is a way of rewarding the employees of a start-up company with shares or stock options.

The most noteworthy tax changes are the current exemption from 12,000 euros to 50,000 euros per year. Another measure is that the need for the offer to be made under the same conditions to all employees is eliminated. The new regulations introduce a special valuation rule for work income in kind with the purpose of clarifying the value corresponding to shares or participations granted to employees of emerging companies.

2. Extension of residence permits to foreign entrepreneurs, investors and students and new visa for digital nomads. 

Measures are established to attract and retain the best international talent, as well as foreign entrepreneurs, investors and students, facilitating their entry and residence in Spain. To this end, new visas are created and the duration of residence authorizations is modified, and the validity of initial residence authorizations for entrepreneurs, investors and foreign students is extended. For entrepreneurs who want to start a business activity in Spain, the initial residence authorization is extended from one to three years. 

3. Impatriate regime: workers posted to Spain may benefit from the special tax regime.

Workers, highly qualified professionals, entrepreneurs and investors, and their family unit, may opt to be taxed under the Non-Resident Income Tax (IRNR) during the tax period of change of residence and the following five tax periods. When paying IRNR, they will be taxed at the general rate of 24% up to 600,000 euros of net taxable income.

To do so, they must comply with the condition of not having resided in Spain during the five tax periods prior to the establishment -before the Startups Law it was 10-. In addition, in order to benefit from this tax measure, the travel to Spanish territory must be for the purpose of a qualified economic activity or as a professional providing services to a startup, among other requirements stipulated in the regulations.

4. Establishment of a specific tax treatment for carried interest in order to promote the development of venture capital.

A specific tax treatment is established for carried interest, i.e., for remuneration obtained for the successful management of venture capital entities linked to entrepreneurship, innovation and the development of economic activity throughout the national territory. Those derived directly or indirectly from participations, shares or other rights, including success fees, will be considered as earned income. It will be qualified as 50% integrable work income, without quantitative limit, as long as the conditions of maintenance and minimum profitability for the ordinary investors of the fund are fulfilled.

5. Reduction of bureaucratic requirements for foreign investors.

With the aim of facilitating investment processes in Spanish companies by foreign investors, the Startups Law includes improvements to reduce bureaucratic procedures for investors who do not reside in Spain. Foreign investors providing capital to an existing or newly incorporated startup company will no longer be required to obtain a foreigner's identity number (NIE). 

6. Improvement in the personal income tax deduction for the subscription of shares or participations in startups.

The new regulatory framework introduces changes in the Personal Income Tax (IRPF) deduction for the subscription of shares or participations in companies. 

In order to benefit from these measures, the law establishes a series of requirements. For example, the amount of the equity of the new or recently created company must not exceed 400,000 euros at the beginning of the tax period in which the taxpayer acquires the shares or participations.

Conclusion

With the Startups LawThe Government seeks to stimulate investment and the attraction of talent, encourage collaboration between SMEs, large companies and startups, promote R&D&I, also in the Administration, and foster cooperation between startups and entrepreneurs and universities and research centers.

The main objective of the Law is to promote administrative agility, for which it provides for a single, telematic window for the certification of innovative companies as Spanish startups (ONE); the non-obligation to obtain a foreigner's identification number (NIE) for non-resident investors, requiring only their tax identification numbers (NIF) for them and their representatives; and the minimum cost of notary and registry fees.

The recovery, attraction and retention of national and international talent is another pillar of the Law. For this reason, it contemplates facilities for obtaining visas and residency for highly qualified startup workers, as well as for non-resident Spanish workers for at least 5 years.

In addition, it seeks to improve the exchange of knowledge through a general and basic regulation on test environments and sandboxes. In this sense, it will allow testing the innovation of startups for one year, in a controlled environment, to evaluate the usefulness, viability and impact of technological innovations in the different sectors of productive activity.

You can download here a one pager with a summary of this Startup Law that we celebrate.

We encourage you to learn more and tell us what you think about this new Startup Law.