Are you thinking of investing in a new business or do you need advice for entrepreneurs? Here we will tell you how the taxation of startups works and which laws govern this sector.
In recent years, the new Startup Law has been implemented, which has as part of its purposes to boost entrepreneurship through some reforms and some tax advantages.
The issue of taxation can be overwhelming for almost any business, but educating yourself about it will help you understand how to manage the taxation of this type of business, especially to find opportunities for savings.
Find out how to manage the taxes of your start-up, how to manage stock options or how to be taxed as a business angel. Also, in this post we will show you some tax advantages available to Startups.
Requirements to be a Startup
A startup is an emerging company whose main differentiating characteristic is that it presents an innovative business model.
In order to present this type of project in the search for investors, it is necessary to demonstrate a predictive analysis of the level of scalability it will have.
Creative proposals that seek to revolutionise the market through technology and communication tend to be widely accepted, and there are numerous cases of successful start-ups in Spain and in several European countries.
There are a series of legal characteristics through which an emerging company can be considered as a startup, according to Law 28/2022 of 21 December, some of which are the following:
- The company must mainly be newly created or not older than 5 years, with the exception of companies in the biotechnology, energy or industrial sectors, where the maximum age may be 7 years.
- The entrepreneur must be a legal entity that has not been listed on a regulated market and has not participated in the distribution of dividends.
- To be considered as a startup, the project must be innovative and must be supported by a scalable business model, making use of data that certifies the estimates.
- 60% of the workers hired must have been linked to the company in Spain; businesses with a merger model that fall outside this rule are not considered startups.
What is the taxation of startups like?
A large part of the tax terms attached to this business model are covered by Law 28/2022 of 21 December, which focuses on the promotion and development of the start-up ecosystem.
This legislation contains some important measures, such as the following:
- Startups will be taxed at the reduced tax rate for newly created entities for a greater number of years and will have the option to defer the debt under certain conditions with regard to corporate income tax.
- Foreigners who decide to invest in startups in Spain will not be required to present a NIE.
- Entrepreneurs will have a higher level of deductions for the management of stock options in personal income tax.
- The law also modifies the duration periods for taxation on events of public interest.
Reduced corporate income tax liability
Mainly the taxation of start-ups modifies the corporate income tax regulation of such entities.
Likewise, startups must make their taxation of such taxes in the first tax period as long as the taxable base is positive.
This is followed by the following three tax periods with a further reduced taxation of 15% as long as the condition remains, according to article 29.1 LIS (art. 7 Law 28/2022).
Whereas under the general regime, entities can only benefit from this reduced rate in the first year in which they have a positive taxable base and the following year.
Another tax benefit is the possibility of requesting deferral of the tax debt at the time of filing the self-assessment, which is applicable during the first two tax periods, but does not apply to complementary self-assessments.
Foreigner’s NIF
The taxation of start-ups makes it easier to attract investors, whether or not they are from Spain. A foreign investor can apply to the State Tax Administration Agency of the country in question for a tax identity number.
On the other hand, if the notarised tax identification document was issued abroad, it is not necessary to adapt its content to Spanish law; an electronic process will be set up to speed up the process.
On the other hand, the investor may request a tax identification number from the AEAT in those cases where the incorporation of a start-up company is being considered electronically.
Non-residents’ income from work in kind
Law 28/2022 in Article 14.1 stipulates that income from work in kind that is outside the scope of personal income tax is exempt from non-resident income tax.
The taxation of startups can appear to be a rather complex issue so it is necessary to evaluate the current laws surrounding this business activity in great detail, all in order to identify those opportunities for deductions.
Optimisation of taxation of stock options
Law 28/2022 sets out a number of amendments to the Personal Income Tax Act, which came into force on 1 January 2023.
- An amendment to Article 42.3f of the LIRPF was established to impose an exemption of 50,000 euros per year in the case of delivery of shares to employees of Startups.
- There is a valuation rule on income from work in kind imposed in Article 43.1.1° LIRPF, this to delimit the value corresponding to the shares.
- For those cases where the income from work in kind exceeds the defined amount, a special time imputation rule is imposed under Article 14.2 LIRPF.
- Whereas, Article 68.1 LIRPF provides for a deduction of 50% of the amounts paid in case of subscription of shares in emerging companies.
Tax arrangements for foreign workers in Spain
The taxation of startups was modified on 1 January 2023 with the implementation of certain adjustments. For example, the modification of article 93 LIRPF on taxation for Spanish or foreign workers in Spanish territory.
In this regard, the number of tax periods prior to the move to Spanish territory, if applicable, was reduced (from 10 years to 5).
Some subjective aspects were also adjusted to the application of this regulation in the performance of employees who travel to Spanish territory to carry out their corporate functions remotely via computer systems.
Finally, the possibility of adhering to the special regime (Beckham Law) on income taxation (in this case, they are taxed as if they were non-residents, despite permanently residing in Spain) in the case of dependent children of the taxpayer and their spouse was highlighted.
Tax classification of the remuneration obtained in venture capital
Law 28/2022 in its last section stipulates a new additional provision in the framework of the LIRPF on the remuneration obtained for the successful management of entities facing venture capital.
All of this is intended to provide a solid boost to the development of innovation-based ventures.
In this sense, income from work derived directly or indirectly from shares, participations or other rights, including success fees, will be considered.
Furthermore, the aforementioned income may be included in the tax base at a rate of 50% of its amount, although there are certain profitability requirements in order to comply with this assessment.
What is the Business Angel tax deduction like?
Another key aspect of Startup taxation is to understand what the Business Angel tax deduction looks like.
According to the new Startup Law the deduction can increase in the matter of investment of a startup in a range of 30 to 50% as long as it increases the minimum base between 60 thousand to 100 thousand euros.
On the other hand, the term to subscribe the shares or participations will scale in its term in a range of three to five years from the consolidation of the corporate entity.
On the other hand, Business Angels will benefit from the IRPF deduction with an even better adaptation to what was perceived years ago.
| Tax deduction for Business Angel | Description |
|---|---|
| Increase in the deduction | The deduction can be increased for start-up investments in the range of 30-50%, depending on the increase of the minimum base between 60,000 and 100,000 euros. |
| Share subscription period | The timeframe for subscribing to the shares or units can be scaled in a range of three to five years from the consolidation of the corporate entity. |
| Enhanced Business Angel benefits | Business Angels will benefit from the personal income tax deduction at an even better rate than in the past. |
Final conclusions and recommendations
Getting advice, especially tax advice in Barcelona, to learn more about the taxation of startups is an excellent idea not only to be in tune with the latest updates in this area.
It is also useful to take advantage of deduction opportunities and thus achieve savings without neglecting tax management.
