Introducing Spain’s startup law

In 2022 the Spanish government introduced a groundbreaking law designed to attract entrepreneurs and investors, particularly those from abroad, with a focus on fostering innovation and growth in the startup ecosystem.

This new framework presents significant opportunities for UK entrepreneurs looking to expand or establish their businesses in Spain, leveraging the country’s strategic location, robust infrastructure, and strong market.

Overview

The Spanish startup law, officially titled the “Ley de Fomento del Ecosistema de Empresas Emergentes,” was passed by the Spanish parliament in December 2022 as part of the broader “Agenda España Digital 2026” initiative. The law aims to position Spain as a leading hub for innovative startups, particularly those in the technology sector.

It addresses the unique challenges faced by startups, including administrative, fiscal, and regulatory burdens, and introduces a range of incentives to create a more favourable environment for business growth.

Key features and benefits of the law

The law introduces several key measures designed to support entrepreneurs and enhance the competitiveness of Spain’s startup ecosystem. These measures include:

Tax incentives:

• Corporate tax reduction: Startups benefit from a reduced corporate tax rate of 15%, down from the standard 25%, for the first four years of profitability
• Enhanced tax deductions for investors: The law increases the maximum annual deduction for investments in new or recently created companies from €60,000 to €100,000. Additionally, the deduction rate has been raised to 50%, making Spain an attractive destination for venture capital and angel investors
• Deferral of tax payments: The law also allows startups to defer their corporate income tax and non-resident income tax payments for 12 months without incurring interest or penalties. No guarantees or collateral are required for this deferral, making it easier for startups to manage financial obligations while focusing on development and expansion.

Simplified administrative procedures:

• New incorporation route: The law simplifies the process of setting up a startup in Spain. Entrepreneurs can now establish their businesses in a single step, obtaining a tax identification number immediately, with subsequent registration and incorporation processes handled electronically
• Reduced costs: The law significantly reduces the costs associated with notarial and registration fees, particularly for limited liability companies – equivalent to an English “LTD” – making it quicker and more affordable to start a business in Spain.

Attraction of talent:

• Stock options tax benefits: The law improves the tax treatment of stock options, a common form of compensation in startups. The tax-exempt threshold for stock options has been raised from €12,000 to €50,000 annually, allowing startups to attract and retain top talent by offering equity-based compensation

Fostering a collaborative ecosystem:

• National Entrepreneurship Office (“ONE”): The law establishes the National Entrepreneurship Office, a central body responsible for coordinating support services for startups across Spain. ONE acts as a hub for information on grants, funding opportunities, and other resources available to entrepreneurs
• Innovation sandboxes: The law encourages the creation of regulatory sandboxes, which provide a controlled environment for startups to test innovative products and services under real-world conditions. This initiative is particularly relevant for fintech and other regulated sectors, allowing businesses to innovate without the immediate pressure of full regulatory compliance.

Requirements to be considered a “startup”

To qualify for the benefits, a company must meet several specific requirements as outlined below:

Young company

To be considered a startup, the company must be newly established or have been in operation no longer than five years from its date of incorporation, or seven years for startups operating in specific sectors. These sectors include biotechnology, energy, industrial technology, or other sectors considered strategic or that involve long research and development cycles.

Independence

The startup must not be the result of a merger, spin-off, or restructuring of an existing company. Additionally, the startup cannot be a subsidiary or under the control of another company that does not meet the criteria.

Innovation (subjective requirement)

A defining characteristic of a qualifying startup is its focus on innovation. The company must:

• Demonstrate a strong innovative character, typically by leveraging new technologies or creating novel products, services, or processes that distinguish it from existing market offerings
• Obtain certification from a recognised body or institution that validates its innovative status, if required.

Location in Spain

To benefit ,the company must be headquartered in Spain or, at least, have a permanent establishment in Spain. Moreover, 60% of the employees should be based in Spain.

Limited size

The law sets specific limits on the size of the company to ensure it remains within the startup category:

• Annual revenue must not exceed €10m
• Fewer than 250 employees.

No profit distributions

A qualifying startup must reinvest profits into the business rather than distributing them to shareholders.

Not publicly traded

The startup must not be listed on any regulated stock exchange. This, however, will not restrict the startup from joining alternative stock markets such as BME Growth.

To officially be recognised as a startup under the Spanish startup law, a company must undergo a certification process. This process is managed by ONE. The certification must be renewed annually to ensure that the company continues to meet the necessary requirements.

Why UK entrepreneurs should consider investing in Spain

For UK entrepreneurs, this presents a unique opportunity to tap into one of Europe’s most dynamic markets.

Spain is the fourth-largest economy in the Eurozone, with a population of over 47m people. It also serves as a bridge to Latin America, providing access to a market of over 650 million consumers. This makes Spain an attractive base for businesses looking to expand internationally.

Additionally, Spain boasts world-class infrastructure, including high-speed internet, modern transportation networks, and a well-developed financial system. The country is also home to several leading technology hubs, such as Barcelona, Madrid and Málaga, which are recognised for their growing startup ecosystems.

This article was authored by Hector Brito, Tribecca Abogados.