Law tax

Tax proposal on the start-up law in Spain: details and analysis

Three years after its initial announcement, the Spanish government gave the green light to the “start-up law” and forwarded it to parliament. The bill that could be approved by mid-2022 is part of the reform package that Spain and the European Commission have agreed to in order for Spain to receive stimulus funds from the European Union.

While entrepreneurs expected a much more ambitious proposal, the Minister of the Economy, Nadia Calviño, hopes that these measures will attract investors and high incomes and help Spain “to become one of the most attractive for the creation of start-ups “.

According to the current proposal for a company to be considered a start-up, it must be less than five years old (seven in the case of biotechnology or industrial companies), have an innovative character and a technological base, and a figure of annual business less than more than 5 million euros. It cannot be listed on the stock exchange or distribute dividends, and more than half of its employees must reside in Spain.

The new law will make it easier to register new start-ups in less than six hours and in one step, without having to pay notary fees.

In order to promote private investment in research and development, the deduction for investment in start-ups will be increased to 50% and the ceiling of the tax deduction will be reduced from € 70,000 (US $ 79,000) to € 100,000. ($ 113,000) per year. The government will also subsidize some start-ups and seek to stimulate innovation with so-called sandboxes, as well as measures specifically targeted at start-ups led by women.

In addition, under the new law, employees can receive up to € 50,000 ($ 56,300) per year in stock options, a common form of remuneration in start-ups, without having to pay tax. until the options are liquidated, when the previous limit was set at € 12,000 ($ 13,500).

Corporate tax will also be reduced for these companies from 25% to 15% for a maximum period of four years after the tax base becomes positive and as long as the company is still considered a start-up. Start-up employees, investors and so-called digital nomads will be offered a special five-year visa and favorable tax regime that will allow workers to pay the 15% non-resident tax rate.

However, many start-up entrepreneurs consider the new bill insufficient in terms of promoting investment and employment. Temporarily reducing corporate taxes is not of much help for companies which, in the first years of operation, usually do not have a profit, and when they do, they are often of a disadvantage. small size. Also, entrepreneurs consider that the main taxes that start-ups are confronted with during the first years of activity are taxes linked to the cost of labor, and in particular social contributions, but the new bill does not mention this. . In addition, all new businesses should benefit from the reduction in bureaucracy and registration procedures. This regulatory simplification will be valuable for many more than those who fall under the definition of “start-ups”.

Spain’s current tax regime is not attractive to start-ups or international investments. Last year Spain introduced two new taxes, the digital services tax and the financial transaction tax, increased capital gains, dividends and the highest personal tax rates, and reduced the participation exemption for dividends and capital gains earned abroad. In just one year, Spain has lost four places in our 2021 International tax competitiveness index, from 26e to 30e.

In addition, the 2022 budget proposal foresaw a new minimum corporate tax rate of 15% for large companies with annual turnover exceeding 20 million euros ($ 23 million), while banks and energy companies must pay a minimum of 18%. The goal is to prevent businesses from using tax deductions and loopholes to pay significantly less than the current official corporate tax rate of 25%. Spain is sending mixed signals to investors as, on the one hand, policymakers plan to increase the effective corporate tax rate and, on the other hand, reduce it for a handful of companies.

Also to consider: labor taxes in Spain are relatively high compared to other European countries. Some regions of Spain, such as the Valencian Community, have the fourth highest tax rate (54%) in Europe, after Denmark (55.9%), France (55.2%) and Austria (55%). In fact, Spain already offers a special tax regime for non-residents, whose Spanish income is taxed at a general rate of 24% and 19% in the case of residents of the European Union. A policy to attract foreign workers or digital nomads with an additional 4 point tax cut can help, but if local citizens do not also reap the benefits of reforms, governments risk attracting foreigners without rendering the country attractive to their own citizens. work, invest and prosper.

Spain should instead follow the example of Madrid, the most competitive region in the country, which, in addition to repealing three additional regional taxes that collect little revenue and are burdensome for small businesses, recently approved a reduction of general tax of 0.5 point for all workers. The fact that Spain does not lead the highest statutory tax rate in Europe is due to regions like Madrid which by 2022 will have the highest overall tax rate of 45%. A more efficient income tax system is a better goal than focusing solely on incentives for foreigners to change tax residency.

Instead of focusing on startups and international workers, policymakers should adopt broad, broad tax reforms that support investment, economic growth and jobs. Policymakers should follow Madrid’s lead and repeal wealth tax and inheritance tax that negatively impact entrepreneurial activity, savings and work. Instead, Spain should consider full expensing as a way to increase private investment and accelerate economic recovery, especially since one of the key objectives of the stimulus package is to increase the formation of capital.

By supporting private investment, Spain would also create jobs and become attractive to highly skilled workers while increasing intraregional and international tax competitiveness.

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