Tax incentives for startups and emerging companies

On 21 December 2022, Law 28/2022 of 21 December, on the promotion of the ecosystem for emerging companies (hereinafter, the startup law), was published.

In Spain, an emerging ecosystem of startups has been developing, and with the aim of reinforcing and promoting such companies as one of the driving forces behind the recovery and modernisation of the Spanish economy, the Recovery, Transformation and Resilience Plan includes the “Spain Entrepreneurial Nation Strategy”. This strategy sets out, among other measures, support for entrepreneurship (with a focus on female talent), financing for tech startups, the creation of the national entrepreneurship office (ONE), and legislative reforms to facilitate business creation and growth.

In this regard, startups face specific challenges, such as high risk, the need for initial investment, exponential growth expectations, and global competition for talent and capital.

Since the traditional legal framework is not well suited to these companies, a range of incentives is being promoted, including tax benefits, reduced administrative burdens, and increased regulatory flexibility to attract investment and talent.

In this article, we set out the key tax benefits available to such companies.

What is an emerging company or startup?

According to article 3 of the startup law, a company is considered to be an emerging company if it meets all of the following requirements:

• Newly created or registered less than five years ago (seven years for certain sectors, such as biotechnology or energy

• Not formed through a merger, demerger, or transformation of pre-existing companies
  
  
• Has not distributed profits
  
  
• Not listed on a regulated market
  
  
• Has its registered office or permanent establishment in Spain
  
  
• At least 60% of its workforce has an employment contract in Spain
  
  
• Develops an innovative project with a scalable business model

However, companies that are not up to date with their tax and social security obligations cannot benefit from the tax incentives provided for under this law.

What are the tax benefits for startups?

The startup law introduces several tax measures to support entrepreneurs, the most notable of which are outlined below:

Reduced corporate income tax rate for startups

Taxpayers subject to corporate income tax or non-residents earning income through a permanent establishment will be subject to a reduced tax rate of 15% during the first tax year in which the company generates a positive taxable base, and for the following three tax years, provided the company continues to meet the requirements to qualify as a startup.

No obligation for emerging companies to make advance corporate income tax payments

Corporate income tax and non-resident taxpayers earning income through a permanent establishment are normally required to make advance tax payments under article 40 of Law 27/2014 on corporate income tax.

However, companies that qualify as emerging companies will not be required to make such advance payments during the first two tax periods in which their taxable base is positive.

Deferral of corporate income tax payments for emerging companies

Corporate income tax and non-resident taxpayers with a permanent establishment may defer payment of corporate income tax without the need to provide guarantees during the first two years in which their taxable base is positive.

The tax authorities will grant the deferral of payment, exempt from guarantees, for a period of twelve and six months, respectively.

Nonetheless, in order to benefit from this incentive, the startup must be up to date with its tax obligations on the date on which the deferral is requested.

Tax incentives for employees of emerging companies

One of the most common current forms of remuneration used by startups is the granting of shares or equity interests to their employees.

In this regard, the startup law provides for an annual exemption of €50,000 for employees of emerging companies who receive employment income in kind in the form of shares or equity interests in such companies. This exemption also applies to employment income in kind arising from share option schemes (commonly referred to as stock options).

Where this €50,000 threshold is exceeded, a special timing rule allows the employee to defer the taxation of the excess amount over a period of ten years, provided certain conditions are met.

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