by Ignacio Lacasa Managing Partner Across Legal &
Sarah Schwartz Partner Across Legal VC/M&A
Could your client be interested in investing in the European Union? On July 6, 2021, the Spanish Council of Ministers presented a preliminary bill commonly known as the Law for Start-ups. This law increases visibility of the Spanish entrepreneurial ecosystem and attempts to modernize the existing legislation to address the specific needs of start-ups, thereby attracting more investments and facilitating the creation of start-ups.
Under this proposed bill, to qualify as a “start-up”, the company must fulfill the following requirements:
- incorporated less than five years ago (or less than seven years for those companies in the biotechnology, energy and industrial industries);
- locate its registered office or permanent establishment in Spain;
- obtain less than EUR 5 million per year in business volume;
- qualify as an “innovator” as determined by the Empresa Nacional de Innovación (ENISA);
- distribute or have distributed dividends;
- not be a publicly listed company;
- originated from a merger, spin off or transformation of another company;
- contract at least 60% the workforce in Spain; and
- the founder cannot have benefited from this regulatory regime beforehand with another company and must otherwise not have any debts with the tax authorities or committed any crimes such as money laundering, white collar crime, financing terrorism, etc.
Spanish lawyers have made great strides adapting US style venture capital financing into a continental European codified legal system. Notwithstanding, there are several gaps where the two legal regimes are not compatible. The Law for Startups attempts to address several of these gaps, as well as promote foreign investment into, and incentivize foreign talent to work for, Spanish companies. Several of the benefits are mentioned below:
- Increased flexibility related to stock option plans- under Spanish law it is difficult to create stock option plans in limited liability companies in part because the rules related to treasury shares issuances are quite restrictive. To address this pain point, the Law for Startups increases a tax exception for stock option plans from EUR 12,000/year to EUR 45,000/year, as well as permit the shareholders of a startup to authorize up to 20% of the share capital as treasury shares which can then be used as a compensation plan for directors, employees, and other collaborators.
- New visa for digital nomads- the Spanish legislature has proposed to create a specific, one-year visa for digital nomads who wish to live in Spain and work for a foreign company.
- Reduced paperwork- Foreign investors will no longer be required to obtain a personal identification number (NIE) and thus will only be required to obtain a Spanish tax number (NIF). The new law proposes two new electronic ways to obtain a NIF, which is a significant improvement over having to obtain it through an in-person appointment.
- Reduced administrative fees and quicker registration in the Commercial Registry
In addition, the Law for Startups introduces several tax benefits for qualified companies including:
- Reduced tax rate: startups will benefit from a reduced corporate tax and non-resident tax rate of 15% (from 25% previously) in the first year with a positive tax base, and for the following three years if the company continues to qualify as a startup.
- Increased tax deduction: the tax deduction for investments into startups is increased to 40% of the amounts paid, with a cap of EUR 100,000.
- Delayed tax payments: in the first and second year when there is a positive tax base, startups can request that their corporate and non-resident tax debt be deferred, without interest accruing, for 6 or 12 months.
- During the two years after the company has a positive tax base, the startup will not have to make partial payments related to corporate tax or the non-residents tax.
Overall, practitioners have embraced this proposed bill since it will provide flexibility and help startups in their initial stages. Hopefully this proposed bill will spurn additional changes that foster innovation.