New start-up law in Spain with tax incentives for emerging companies and expatriates

We would like to inform you that last December 22, 2022, the Startup Law (Law 28/2022, promoting the ecosystem for startups), was published in Spain, with tax incentives for startups and their investors, as well as other tax incentives for expatriates and others.

This article will summarize the main tax incentives introduced in this new Spanish Law.

Before analyzing the main tax incentives, the Law itself defines a start-up company in the following terms:

To be a newly created company or a company registered in the Commercial Registry no more than five years ago (7 years for companies in biotechnology, energy, industrial, and other strategic sectors or that have developed their technology, designed entirely in Spain).
Not to have undergone restructuring operations.
Not distribute or have distributed dividends
Not be listed in regulated markets.
At least 60% of the startup’s workforce must have an employment contract in Spain.
Develop an innovative entrepreneurial project with a scalable business model.

Companies that want to obtain benefits under the Start-up Law will have to apply to the ENISA institute (“Empresa Nacional de Innovación, S.E., S.A.”) for certification that they have an innovative business project with the above requirements.

ENISA shall have 3 months from the date of application to evaluate the project. If this period elapses without a resolution being issued, it will be understood to have been approved by positive administrative silence.

Registration in the Mercantile Register of the status of a start-up company will be a necessary and sufficient condition to avail of the benefits and specialties of this law.

Start-up companies will cease to be eligible for the benefits provided for in the Law when any of the following events occur: It ceases to meet any of the requirements, the company is extinguished, 5/7 years have elapsed since its creation, it is acquired by another company that does not have the status of an emerging company, the annual turnover of the company exceeds the value of ten million euros, it carries out an activity that generates significant damage to the environment, or the partners who hold, directly or indirectly, a stake of at least 5 % of the share capital or administrators of the emerging company have been convicted by a final judgment.

The following is an analysis of the main tax innovations set out in the Law:

Corporate Income Tax news

Reduction of the tax rate to 15% for start-ups in the first tax period in which the company makes a profit and the following three years (maximum period of 4 years).
Deferral of corporate taxation without guarantees and without interest for late payment in the first two tax years in which the tax base is positive. The deferral will be granted for twelve months in the first year and six months in the second year from the end of the deadline for payment of the tax debt in the voluntary period.
Emerging companies will not be obliged to make prepayments in the first two years in which their tax base is positive, provided they continue to be considered startups in those periods.

Personal Income Tax news

The delivery of shares or units to employees by Emerging Companies (“stock options”), as of 1 January 2023, will have the following tax benefits:
- 50,000 euros exemption (the exemption amount is increased from 12,000 to 50,000 euros).
- The grant of shares in emerging companies to employees shall be valued at the value of the shares subscribed by an independent third party at the last capital increase in the year preceding the grant or, failing this, at the market value at the time of the grant to the employee.
- Possibility of deferring the temporary imputation of the part of the yield exceeding 50,000 euros when any of the following circumstances apply:
  - Admission to stock exchange trading.
  - Sale of shares or holdings.
  - After ten years have elapsed since the delivery of shares or holdings.
- The offer need not be made under the same conditions to all employees in the company, group, or sub-groups of companies.

As of 1 January 2023, the deduction for investment in new or recently created companies will be improved in the following terms:
- The deduction is increased by raising the rate from 30% to 50% and increasing the maximum base from 60,000 to 100,000 euros.
- In general, the period for subscribing shares or holdings is increased from three to five years, starting from the incorporation of the company, and up to seven years for certain categories of start-up companies.
In order to attract talent to Spain, the special tax regime applicable to workers posted to Spanish territory is modified with effect from 1 January 2023 in the following terms:
- Access to the regime is improved by modifying the period of non-residence for tax purposes to 5 years before that in which the posting takes place (previously, the period was 10 years).
- The reasons for relocation entitling to apply the scheme are extended to:
  - Workers who move to Spanish territory to work remotely (teleworking). This circumstance is understood to be fulfilled in employees with the international teleworking visa provided for in Law 14/2013.
  - The administrators of emerging companies regardless of their percentage shareholding in the entity’s share capital (except for asset-holding entities).
  - Persons carrying out an entrepreneurial economic activity in Spain in accordance with the procedure provided for in Article 70 of Law 14/2013.
  - Highly qualified professionals who provide services to emerging companies or who carry out training, research, development and innovation activities, receiving remuneration that represents more than 40% of their total income.

- The special regime is extended to the expatriate’ spouse, the parent of the expatriate’s children, and children under the age of 25 or any age in the case of disability.
- It is effective as of 1 January 2023 and retroactive in the case of relocations in 2022.

The taxation of “carried interest” (income obtained from the management of funds linked to entrepreneurship, innovation, and the development of economic activity) is regulated from 1 January 2023.
- They will be considered as earned income.
- This income will be included in the tax base at 50% of its amount, without any applicable exemption or reduction, when certain requirements are met.