Fourteen Proposals to Improve the New Spanish Startup Law
And the day finally arrived. Five months after announcing that its approval was “imminent” (and more than two and a half years after starting its processing), on 6 July the Government approved its Report on the Draft Startup Law.
Spain does not yet have a Startup Law in force, far from it. What it does have is a draft law that has been submitted for public information; this means that anyone can contribute their opinions and proposals through this website. The deadline for submitting comments is 21 July. In light of this, this post will do two things. First, it will summarize the main novelties brought by this proposed Startup Law. Second, it will make fourteen proposals for improving the text.
What does the new Startup Law propose?
The aim of the Law is to “support the creation and growth of start-ups in Spain”. It aims to achieve this objective in the following way:
Definition of an emerging company or startup
- Companies and groups of companies less than 5 years old (or 7 years old for biotechnology, energy or industrial companies) with a turnover of less than 5 million euros per year.
- With registered office or permanent establishment in Spain.
- That have not arisen from a merger, spin-off or transformation operation.
- That have not distributed dividends and are not listed.
- With 60% of the workforce with a contract in Spain.
- Innovative in nature. A company is considered to be innovative when its purpose is to solve a problem or improve an existing situation through the development of products, services or processes that are new or substantially improved compared to the state of the art and which entail a risk of technological or industrial failure.
- Accreditation by the National Innovation Company (ENISA). The ENISA assessment must be repeated every year.
Requirement that none of its founders have previously founded another company that has benefited from the provisions of the Law.
- The tax rate for Corporate Tax and Non-Resident Income Tax (IRNR) is reduced from 25% to 15% in the first tax period in which the taxable base is positive and in the following three, provided that the definition of start-up is maintained.
- Possibility of requesting deferral of the Corporate Tax and IRNR tax debt in the first tax period in which the tax base is positive and in the following one, with waiver of guarantees (for 12 months) and without late-payment interest (for 6 months).
- The obligation to make payments in installments of Corporate Tax and IRNR in the two years following the year in which the taxable income is positive is eliminated.
- The exemption amount is increased from 12,000 to 45,000 euros per year in the case of the exercise of stock options.
- The conditions for the generation of treasury shares in limited liability companies are made more flexible. Treasury shares may account for up to 20% of total capital.
- Creation of a specific tax regime for people who work remotely from Spain to be subject to IRNR with relaxed requirements (the requirement of not being a tax resident in Spain is reduced from 10 to 5 years) and the period of enjoyment is extended from 5 to 10 years.
- Eligibility is extended to the spouse, the parent of children, children under 25 or disabled children, regardless of their age.
- A specific visa is created for people working in Spain for a foreign company: the visa for international teleworking.
Investors in startups
- The maximum deduction base for investment in start-ups is raised from 60,000 to 100,000 euros per year.
- The deduction rate is raised from 30% to 40%.
- The period during which start-ups are considered to be newly created is increased from 3 to 5 years.
Administrative flexibility and promotion of innovative public procurement
- It will not be compulsory to obtain a Foreigners’ Identification Number (NIE) for investors who are not resident in Spain, although they will have to obtain a Tax Identification Number (NIF).
- The start of activity is facilitated from the first step of the accreditation procedure as a startup and the granting of a Tax Identification Number (NIF), so that the company can complete the procedures for its incorporation at a later date. The deadline for registration of the start-up in the Commercial Register in the case of using standard articles of association will be one day.
- The procedures for the cessation of activity are streamlined and may be carried out entirely electronically.
- A basic framework for regulatory sandboxes is created.
- Innovative public procurement aimed at startups will be encouraged and public administrations will take into account the characteristics of startups when specifying the economic and technical solvency requirements.
- The State will promote the establishment of co-investment funds to attract private capital to finance startups.
- Creation of a National Forum of Startups to analyze and debate public policies to promote entrepreneurship in research and development and innovation.
2. Fourteen proposals to improve this law
One may be more or less satisfied with this text, but at least it exists and can be amended. The whole process until the Law is finally approved in the Spanish Parliament (which will take many months) will be aimed at adjusting and improving the text (hopefully). Let us see what improvements could be made.
I. Support for serial entrepreneurs: deletion of Article 3.2
The introduction of the proposed Law reads as follows:
“However, if the first attempt fails, as is characteristic of high-risk projects, the incentives of this law may be reapplied to a second company formed by the same founders, as a second chance should be given to anyone who, despite the failure, but with the experience gained, wants to try again.”
Six pages later, Article 3.2 of the Draft Law reads as follows:
“A company shall not be understood to be newly created when any of its founders had been founders of a first or second start-up company that had benefited from this law, even if they had lost that status due to premature extinction of the company.”
This is absurd. The same Law is saying one thing and its opposite. It is clear that the object must be what is stated in the introduction, i.e. that the same founder can benefit from the provisions of the Law after the failure of his first company.
II. Inclusion of high growth potential in the definition of a startup.
III. Mention of scaleups. The most successful startups should also receive support to continue growing. Tax and labour measures should be included for companies between 5 and 10 years old and with a turnover of up to 50 million euros.
IV. Explicit creation of a Startup Registry in ENISA that would issue a kind of startup certificate. This certificate would have full effect as accreditation of startup status in all areas and at all levels of government. The certification process at ENISA should have a maximum time limit, e.g. one month. The certification should not be repeated every year.
V. Update industrial property regulations so that software can be patented.
VI. Further develop the facilities for the termination of the startup’s activity and the effective limitation of the liability of the Founders and Investors. The Second Chance Law should certainly be revised.
VII. Introduce rebates of up to 100% on Social Security contributions for the founders of start-ups and their first employees.
VIII. Introduce personal income tax exemption for capital gains obtained after the sale of shares or holdings, provided they are reinvested in a new start-up within a period of four years.
IX. Liquidate the “Exit Tax” so that an entrepreneur who moves his or her residence outside Spain does not have to pay tax on the theoretical taxation of his or her shares. He or she will only have to pay tax when the real capital gain occurs, when selling his or her shares (“Deferred Tax”).
X. Creation of a secondary market for startups and scaleups so that their shares and participations are more liquid.
XI. Exemption from taxation as earned income of the capital gain generated after giving startup employees shares or participations free of charge at a price below the market price.
XII. Follow the Estonian model more clearly so that a startup can be created in Spain in one day via the web from anywhere in the world with the option of a virtual address, with a VAT number, registration with the IAE, entry in the Mercantile Register and bank account (including neobanks).
XIII. Facilitate the investment of pension funds in Private Equity and Venture Capital funds by eliminating the limitation of cascading fees so that Private Equity fees do not count together with pension fund fees to reach the maximum limit of 1.5%.
XIV. To liquidate the government controls on foreign investment introduced during the pandemic (RDL 8/2020 and RDL 11/2020) which mean that the Government must formally authorize any investment of more than 10% of the capital of a Spanish company (whether by purchase or by capital increase). In practice, this control applies to companies in all sectors of the Spanish economy.