Feb 13 2023

The new law on start-ups and its revolution in the entrepreneurial sector

In recent years, the average volume of investment per operation in startups (emerging companies generally dedicated to markets related to new technologies) has multiplied exponentially in Spain. This positions Spain as one of the most attractive countries for investing in and developing businesses through start-ups.

The Spanish government is no stranger to this situation and aims to position Spain as one of the leading economies in terms of attracting foreign investment. To this end, on 1 December 2022, the plenary session of the Spanish Congress of Deputies approved Law 28/2022, on the promotion of the start-up ecosystem, also known as the “Start-up Law”.

This long-awaited regulation is designed to help Spanish startups develop their projects more efficiently. This includes fostering entrepreneurship and innovation in Spain by facilitating access to funding, advice and other resources that can help them develop their projects. In addition, this law also establishes a framework for investment in startups, allowing access to private and public investment, as well as the creation of specialised investment funds.

The Startup Law is an important step for the development of entrepreneurship in Spain as it represents a great opportunity for Spanish startups to develop their projects in a safe and successful way.

Benefits of the Startups Act for entrepreneurs

The Startups Law aims to facilitate access to financing for emerging companies, through means such as crowdfunding or venture capital. To this end, among the main advantages approved in this Startups Law are important tax incentives for start-ups, such as a reduction in corporate income tax from 25% to 15% during the first four years. It also offers the possibility for companies classified as start-ups to defer their tax debt or eliminate the obligation to pay in instalments.

The law also approves significant tax deductions of between 30% and 50% for annual investments of up to 100,000 euros in income tax or VAT and a tax exemption for stock options from 12,000 to 50,000 euros per year.

In addition, the law regulates the tax treatment of commissions payable to directors, employees or managers of private equity funds (“carried interest”) for the achievement of objectives in their capacity as “managers”. Although this remuneration is classified as employment income for personal income tax purposes, only 50% of the amount received in this respect will be taxed, subject to certain conditions.

In the area of Intellectual Property protection, the law protects the intellectual property rights of startups, ensuring that their ideas and products are protected and encouraging cooperation between startups, companies and universities to promote the transfer of knowledge and the creation of new products and services.

From a commercial point of view, the Startup Law represents a significant administrative simplification by facilitating the process of creating and managing a startup, reducing the time and cost involved, regulating the attraction of investment through crowdfounding and making investment by foreign partners more flexible by not requiring them to obtain the hitherto tedious NIEs, although they do need to obtain NIFs.

Finally, the Law on Startups creates support, advice and training programmes to help them grow and develop and favours the creation of sandboxes, includes an additional provision to create the Spanish Agency for the Supervision of Artificial Intelligence and extends the amendment of the Audit Law.

What you need to know to benefit from the Startup Law as an entrepreneur

The essential requirement for a startup to take advantage of these benefits is that it fits into the emerging condition. To do so, it must be certified as such by ENISA (Empresa Nacional de Innovación SME) by applying for inclusion in the register of emerging companies and complying with a series of requirements that we will see below. However, it should be noted that during the parliamentary process, more than 80 amendments have been introduced with respect to the Bill, with new features such as positive administrative silence in the recognition by ENISA. In this way, a solution has been found to the presumed avalanche of applications that will be received in the coming months from Spanish companies that consider that they meet the requirements.

The first of the requirements to be taken into account are that the company must be based in Spain, be less than five years old (seven in certain sectors of the technology industry) and not have its origin in a restructuring operation of companies that are not emerging.

In terms of economic criteria, the company must not have distributed profits in the past, nor during the time in which it benefits from this consideration. In addition, companies with a turnover of more than 10 million euros will not be considered as emerging companies. In this regard, it is important to take into account the consideration of a business group in accordance with Article 42 of the Commercial Code.

Finally, the company must have as its main activity the development of an innovative entrepreneurial project with a scalable business model.

The first in Europe to specifically support the entrepreneurial ecosystem

With this law, a pioneer in Europe, the Executive foresees a minimum increase of 25% in investment in Spain over the next five years. Moreover, this law was not the only legislative innovation in 2022, as in September the Law on the creation and growth of companies (known as the “create and grow” law) was approved, which aims to boost the growth of the companies that make up the Spanish economic environment, especially SMEs, by reducing the costs and formalities involved in setting them up.

All this puts Spain in an advantageous position on the international stage in terms of entrepreneurship and innovation, although in some aspects the regulation is not very ambitious. A more flexible definition of the start-up concept would have been particularly desirable, as well as greater facilitation of investment by non-residents, especially with regard to obtaining NIEs and NIFs.

In summary, the Law on the Promotion of the Startup Ecosystem is an important step towards boosting the sector of the economy and encouraging the development of and investment in startups.

If you are interested, as startup lawyers at Letslaw we can help you make the most of the main points of the Startup Law.