Equity is one of those terms that any founder or investor in Spain ends up hearing, but few articles explain what it actually involves when the deal is structured on Spanish territory: how it is taxed, what deductions exist, and what changes with the Startup Law. In this article we don’t just explain the concept we cover the tax and legal layer you need before signing a shareholders’ agreement.
What is equity?
Equity is the value of an investor’s stake in a company: in accounting terms, the difference between the company’s assets and liabilities. It is also the name given to transactions in which a company obtains financing by giving up a portion of its share capital instead of taking on interest-bearing debt. For the investor, equity represents what they would receive in the event of the company’s liquidation, once all debts have been settled. Capital can flow in through this route mainly via two vehicles: Private Equity and Venture Capital.
Private Equity vs. Venture Capital: key differences
Private Equity
Private Equity invests in mature, already established companies that are not publicly listed or are close to going public. Investors usually institutional funds or large estates acquire significant stakes, often majority stakes, seeking to improve the company’s profitability over the medium to long term. These are high-value transactions.
Venture Capital
Venture Capital targets startups and early-stage companies with high growth potential. The amounts involved are smaller, stakes tend to be minority stakes, and the risk taken on is greater, in exchange for the possibility of a much higher return if the project succeeds. The underlying difference lies in the company’s stage and risk profile: Private Equity bets on improving the profitability of an already proven business; Venture Capital bets on the exponential growth of a business that still has to prove itself. If your company is considering this financing route, it’s worth reviewing beforehand which corporate structure best fits the type of investor you’re looking for.
Stages of an equity investment
- Seed stage: the company needs capital to get off the ground. This is the highest-risk stage, with operating losses common while the business model is being consolidated. Many companies at this stage rely on specialized advisory services for entrepreneurs to make their first corporate and tax decisions.
- Growth stage: the company approaches break-even and uses the investment to scale, in many cases with a future IPO in mind.
- Expansion stage: investor entry is more professionalized, with funds seeking to maximize returns in already consolidated companies. At this stage it is common to formalize the transaction through a capital increase.
Common shares or preferred shares
An investor’s entry into the capital can be structured through common shares which prioritize control over the company or preferred shares which prioritize returns via a preferred dividend. The choice between one and the other is part of the shareholders’ agreement negotiation and has different tax implications that should be reviewed before signing, ideally with support from corporate finance advisors.
How equity is taxed in Spain
This is the part that almost no article on equity explains, and it’s what determines whether a deal ends up being profitable for the investor or not.
Deduction for investment in newly created companies (Personal Income Tax)
An individual investor who takes a stake in the capital of a newly created company can deduct a percentage of the amount invested on their personal income tax return. Under the Startup Law, this deduction was expanded: the deduction rate rose from 30% to 50%, and the maximum base to which it applies rose from €60,000 to €100,000. In other words, investing in a Spanish startup can generate a significant tax deduction on the investor’s personal income tax, in addition to the expected return on the investment itself.
Taxation of carried interest
For managers of Venture Capital or Private Equity funds, carried interest the share of profits they receive when investments succeed is now subject to a specific tax regime. This income is classified as employment income but is included in the personal income tax base with a 50% reduction, resulting in an effective tax rate of approximately 23-27% depending on the autonomous region, compared to the marginal rate that would otherwise apply. This treatment requires meeting a series of requirements, including a minimum holding period for the stakes.
Stock options for startup employees
When the capital investment is combined with employee compensation plans through shares or equity interests (stock options), the amount exempt from personal income tax for the employee rose from €12,000 to €50,000 per year, and the excess above that figure is not taxed immediately: it can be deferred until a liquidity event occurs sale of the company, IPO or, at most, for up to 10 years.
Corporate Income Tax for the company receiving the investment
If the company receiving the equity qualifies as a startup certified by ENISA, it can benefit from a reduced Corporate Income Tax rate and interest-free deferrals in its first fiscal years with a positive tax base, which significantly improves its cash position right when it needs it most. Good tax planning from the moment of incorporation helps take advantage of these benefits without later surprises.
Legal aspects to consider before signing
An equity deal isn’t closed with just the company valuation. Before accepting an investment, it’s worth reviewing, with joint legal and tax advice:
- The shareholders’ agreement, which governs drag-along rights, tag-along rights, anti-dilution provisions and investor exit terms.
- The percentage of capital given up, and its impact on future control over the company’s strategic decisions.
- The most suitable corporate structure for receiving the investment, especially if further funding rounds are anticipated; in some cases, setting up a holding company makes it easier to manage future rounds and the entry of new partners.
- The requirements for maintaining, if applicable, ENISA startup certification, since losing it can also mean losing the associated tax benefits.
- Prior review of the company (Due Diligence), whether you’re the one receiving the investment or the investor: a tax due diligence process detects contingencies before they become a problem after the deal.
Frequently asked questions about equity
Is equity the same as a loan? No. A loan generates interest-bearing debt that must be repaid. Equity is not repaid: in exchange, the investor receives a stake in the ownership of the company, with the rights and risks that entails.
How much can I deduct for investing in a Spanish startup? Under current regulations, up to 50% of the investment, on a maximum base of €100,000 per year, provided the company meets the requirements to be considered a newly created company.
What’s the difference between common and preferred shares for tax purposes? The underlying tax treatment is similar in terms of capital gains, but the structure of the deal (preferred dividend, payout order upon liquidation) can have different implications depending on how it’s set out in the shareholders’ agreement. It’s worth reviewing on a case-by-case basis.
Do I need tax advice if I’m going to receive an equity investment? Yes. The structure of the deal determines both your future taxation and that of your investors, and an error in drafting the agreement can result in the loss of significant tax benefits, such as the investor’s deduction or the stock options exemption.