Draft of the new Entrepreneurs Law

Fernando Moroy Hueto, academic adviser and professor of the Master in Financial Markets & Investment Banking at Centro de Estudios Garrigues, analyses the draft of the new Entrepreneurship Law.

On 27 December 2021, Bill 121/000081 on the promotion of the startup business ecosystem was published in the Official Gazette of the Spanish Congress of Deputies, starting a parliamentary process that is expected to be approved before the summer — or at least soon after.

Even in the explanatory statement of the bill, the legislator is aware of the growing importance that these startups have in the economic structure of a country — insofar as they base their existence and possible rapid growth on management levers rooted in digitalisation and innovation. The legislator is also aware that their unique typology makes them a poor fit for traditional regulatory frameworks in terms of tax, commercial, civil, and employment law. That is why this bill, in line with other developed countries around us, aims to promote three main elements: i) tax benefits for entrepreneurs, workers, and investors; ii) reduction of administrative obstacles and facilitation of visas; and iii) flexibility in corporate management and in the application of commercial and insolvency principles.

The explanatory statement states that Spain has significant potential to attract highly qualified professionals, whether self-employed or working for others, using digital tools. In addition to assets like the weather, gastronomy, public safety, lifestyle, and culture, Spain is the number one country in the European Union in terms of fibre optics coverage. The country is therefore aiming to become the destination of choice for entrepreneurs and workers in these types of companies, as well as for remote workers in all types of sectors and companies, known as ‘digital nomads’.

The proposed law would also seek to eliminate the existing gender gaps in this field, enabling women to be fully incorporated into the workforce. Furthermore, this law would be complemented by a future law for the creation and growth of companies, whose bill (121/000075) was published in the Official Gazette of the Congress of Deputies on 17 December last year.

Section I of the bill explains the scope of application of the future law, including a specific definition of startups and the requirements they must meet in order to be eligible for the tax and social benefits provided. Such requirements are that the company is newly created or has been established within the last five years (or seven years in the case of the biotechnology, energy, and industrial sectors, or others, depending on the development of technology); that the company is independent (i.e. not arising from corporate restructuring, mergers, spin-offs, etc.); that the company has its registered office or permanent establishment in Spain; that 60 per cent of the company’s workforce have an employment contract in Spain; that the company is innovative (as accredited by ENISA, the Spanish national innovation company, under the terms of Article 4); that the company is not publicly listed and has not distributed dividends; and that it has a turnover of no more than €5 million.

The criteria for accreditation of the innovative nature of startups, which must be requested from ENISA, will be detailed in a ministerial order. If the company belongs to a group of companies as defined in Article 42 of the Code of Commerce, the group and each of its constituent companies must meet the above requirements.

The bill establishes that, if the startup’s first attempt fails — as is often the case in high-risk projects — the incentives provided for in this law can be applied again to a second or third company formed by the same partners. As the bill states, those who, despite the failure but with the experience gained, want to try again, should be given another chance.

Section II and the second and third final provisions of the bill provide for a series of tax incentives. First, the initial taxation of startups is eased, reducing the corporate tax rate from the current 25 per cent to 15 per cent for a maximum of four years, as long as the company maintains its status as a startup (from the first tax period with a positive taxable base). Additionally, it provides for the possibility of deferral of corporate tax debts for the first tax period with a positive tax base and the subsequent one, for twelve and six months respectively (without surety or accrual of late-payment interest). All startups are also permitted not to pay corporate income tax in instalments (in the two tax periods following the first tax period with a positive tax base).

In order to attract talent and provide a remuneration policy appropriate to the situation and needs of this type of company, the taxation of remuneration formulas has been improved for stock options. For example, the personal income tax exemption is increased from €12,000 to €50,000 per year in the case of stock options for employees of startup companies (now it is not necessary to offer them to all employees of the company). To this end, the issuance of treasury shares is also made more flexible (Art. 11). In addition, for the part of the income from work in kind that may exceed the aforementioned amount, a special rule of temporary imputation is established, allowing for that imputation to be deferred until the tax period in which certain circumstances occur, and in any case, within ten years of the issuance of the stock options.

In relation to personal income tax and investors, it is also significant that the bill increases the deduction for investments in new or recently created companies (up to five or seven years for certain categories, as indicated above), increases the deduction rate from 30 per cent to 50 per cent, and increases the maximum base from €60,000 to €100,000. In addition, for founding partners of startups, the application of this deduction is allowed regardless of their percentage shareholding in the company’s share capital.

Access to the special tax regime applicable to workers posted to Spanish territory with the aim of attracting foreign talent (known as the special regime for impatriate workers, or ‘Beckham Law’) is also improved. To qualify for this regime, it will now be enough to not have resided in Spain in the previous five years (down from ten years). In addition, this special regime is extended to the administrators of startups and their spouses and children under 25 years of age who travel with the beneficiaries.

The bill also clarifies the tax classification of the remuneration obtained for the successful management of venture capital entities (known as ‘carried interest’), while establishing a specific tax treatment for such remuneration.

Section III is devoted to foreign investment and talent. The application of the special impatriate regime is extended to ‘digital nomads’: those who come to work in Spain ‘remotely’ for a foreign company (even if that company has no presence or subsidiaries in Spain). A specific visa is also created for these ‘digital nomads’.

Finally, the streamlining of procedures for the creation of startups and the lowering of the minimum share capital (‘Law for the Creation and Growth of Companies’) is also noteworthy, as is the fact that non-resident investors/administrators are no longer required to obtain a NIE (foreigner identity number), although they do need to apply electronically for a NIF (tax identification number).

We will have to wait and see how the Law finally materialises during the parliamentary process, although it seems to be a good starting point for strengthening our entrepreneurial/investor ecosystem, and therefore the creation of wealth in our country.