Questions and answers on Spain’s startup law

Questions and answers on Spain’s startup lawTax benefits for entrepreneurs, investors and professionals; streamlined red tape; and new innovation testing environments are some of the measures covered by the government’s recently approved draft bill. This follows in the wake of the initial draft, with improvements that respond to the specific needs of the startup ecosystem. Here’s everything you need to know to get the most out of it.

The founders of startups face a number of hurdles when they embark on transforming their concept into a viable project. They need to sow the seed, nourish it with funding and talent, and care for it well, finding space to grow in an increasingly swamped market. Spain’s innovation ecosystem may be maturing – more than €4 billion were invested in startups in 2021, the highest figure to date according to El Referente – but it still needs a boost.

This backing has now arrived, courtesy of Spain’s Council of Ministers who approved the Draft bill to promote the start-up ecosystem as part of the country’s wider Spain: Entrepreneurial Nation Strategy. “The unique nature of startups is being recognised for the first time, along with their significance to the economy, with measures to facilitate creation and growth”, summarises Carlos Mateo, President of the Spanish Startups Association, which has been working on getting the startup law approved for some five years.

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The law will also benefit companies with a focus on open innovation. “Any initiative contributing to increased investment in startups will enjoy advantages, attracting international talent, strengthening the ecosystem and giving large corporations like ours more opportunities to innovate”, states a BBVA Open Innovation representative.

If you’re an entrepreneur, you might be wondering exactly how this new law is going to help your project prosper. And we’re making it easier for you, with a little help from the experts. Here’s a snapshot of five key aspects of the forthcoming law in a question and answer format, so you’ll be ready to take full advantage of it as soon as it is approved.

1. What exactly is classed a startup?

First of all, your business needs to comply with the requirements set out in the draft law. It’s aimed at innovative companies that have been operating for under five years (seven in the case of sectors such as biotechnology, industry and energy); aren’t listed on regulated markets; haven’t distributed any dividends; and have an annual turnover of less than €5 million.

Unlike the previous draft bill, startup founders are given three opportunities to reap the benefits of the law. “This is an important change – whether it’s enough remains to be seen. Serial entrepreneurs galvanise a proportion of the ecosystem, and excluding them implies limiting potential growth”, explains Miquel Martí, CEO of Tech Barcelona, an association that promotes innovation in the city. As such, any entrepreneurs who fail to succeed with their first startup (a common outcome when getting such projects off the ground) will have the chance to start a further two business ventures under the same terms.

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If you meet the requirements above, the law enables you to go to ENISA, a public sector company responsible for accreditation. Martí stresses how streamlining this process will be fundamental to startups taking full advantage of the law.

2. How will the law boost entrepreneurship?

The law sets out a package of measures that can be used from the moment a company is created.

  • Streamlined bureaucracy. It eliminates fees for constituting limited companies, simplifying the startup creation process and allowing it to be completed remotely.
  • Tax benefits. Corporate tax is expected to be reduced from 25% to 15% for a maximum of four years, terms will be granted to defer tax debts, and the requirement for any employees also working as entrepreneurs to contribute to the social security system twice will be scrapped for three years.
  • Winding up exemption. Daniela Leal, startup specialist, lawyer and senior partner at EJASO explains that “when net assets total less than half of the company’s share capital, companies enter the winding up process and go into liquidation”: on the contrary, the debts are the responsibility of the administrators. Given that startups often don’t break even or reach the profitability threshold until their product – and the market – are more mature, the draft bill exempts them from being wound up for three years. This in effect will reduce the risk assumed by administrators.
  • Controlled testing environments. Following the introduction of the 2021 financial sandbox (a fintech product and services testing area), environments will be set up for startups working in other sectors where they can carry out testing under the supervision of a regulator, without being subject to the relevant regulations.

3. How will the law help with recruiting talent?

A fundamental element of making a project succeed is having a team of qualified professionals with the right digital skills, but a scarcity of talent is an issue. The draft includes proposals for attracting national and international talent:

  • Favourable stock options. Offering management and employees the chance to acquire shares as a form of remuneration isn’t particularly attractive due to the tax implications. In this vein, the future law will raise the level of tax exemption on stock option income from €12,000 to €50,000. If this figure is exceeded, taxation will be deferred from when the shares are granted (when an employee has no capital to pay taxes) to liquidation (from the sale of shares or exit from the stock exchange) for a maximum of ten years.
  • Visas for digital nomads. Income tax terms for non-resident digital nomads (entrepreneurs and remote workers who relocate to Spain) are being improved, and they’ll also be able to access a special visa for a maximum of five years. Some regions have already made a move to attract remote professionals: the Autonomous Government of the Canaries has announced a plan to attract 30,000 digital nomads in the next five years. This special regime is also available to professionals who have lived in other countries for at least five years, in order to encourage talent to return.
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4. Will it encourage investment?

The law incorporates a more favourable framework for raising funds, giving your startup the impetus it needs to grow. Firstly, it removes the requirement for an NIE (foreign ID number), making it easier for non-resident investors to invest.

Secondly, there will be tax deductions. One measure being introduced is to raise the maximum deductible amount for investments in startups from €60,000 to €100,000. This “encourages investors to consider increasing their capital investment over the year”, states Daniela Leal of EJASO. Additionally, it sets out a favourable tax regime for carried interest (a fee paid to venture capital fund managers for successful work).

5. What impact will it have?

“We’re hoping the law will give our sector the final push it needs. We don’t just want to be on a level with neighbouring countries, we want to lead startup regulation”, says Carlos Mateo, President of the Spanish Startups Association. “It will increase the number of companies being created and foster better conditions for digitalisation and innovation”, adds Leal. Having said that, the experts we consulted remained cautious when it came to offering a concrete assessment of the impact – at least until the final text is approved. Parliamentary process has now started and the government expects the law to be approved in mid-2022.

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The amendments to the initial draft may have been praised, but there are areas for improvement. These include removing social security contributions for recently launched startups, increasing the turnover limit to be recognised as such, and approving specific measures for scale-ups with a proven growth trajectory. Nevertheless, the draft bill represents a major step forward on the route towards a regulatory system tailored to the needs of startups, providing an extra dose of nourishment to enable the fruits to grow.

There are also other ways of sourcing nourishment and support, such as open innovation. BBVA, for example, offers Fast Track (part of its Open Innovation programme), an agile framework for collaboration between banks and fintech projects. And the addition of key players such as entrepreneurs, investors, professionals, corporations and public bodies this year is set to help this ecosystem flourish further.

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