Startups: Tax advantages of creating or investing in technology companies

As we indicated in our previous postIn our article on the legal implications of startups, the term startups is used to refer to emerging, start-up or incipient and recently created companies, usually founded by one or more entrepreneurs, on a technological, innovative basis, which stand out from the general market and which are expected to have a high growth capacity.

From a tax point of view, there are several specialities and tax advantages that apply to the start-up ecosystem.

1) Personal income tax deduction for investments in newly created companies

Personal income tax regulations encourage investment in newly created companies with certain tax deductions.

Individuals can deduct 30% of amounts paid in the year for subscribing to shares or units in new or newly created enterprises. In addition, the person subscribing to the shares is also allowed to provide the entity with the appropriate business or professional knowledge for the development of the activity. This is particularly relevant for those taxpayers who hold the status of investment partner in a start-up company, but also form part of the development team of the entity to which they apply their technological know-how.

The maximum base for the deduction shall be 60,000 euros. [1] and will correspond to the value of the shares or holdings subscribed. However, amounts paid to acquire shares that have been taken into account for regional deductions (as we will see below) cannot be taken into account.

Therefore, and in accordance with the limits indicated, this deduction could mean a reduction of up to 18,000 euros in the tax liability to be paid in income tax.

Requirements for applying the deduction

The requirements to be able to apply the deduction are as follows:

  • Time limitation:
    • The participation in the when the entity is incorporated or by means of a capital increase operation taking place within 3 years of incorporation.
    • In addition, once acquired, it must maintain such participation for a minimum of 3 years and a maximum of 12 years. This means that a taxpayer wishing to apply this deduction is obliged to sell the holding after the 12-year period following its acquisition.

  • Limitation on % of ownershipThat the direct or indirect participation in the newly established company, together with family members and spouses up to the second degree of consanguinity, does not exceed 40% of the share capital. This requirement must be fulfilled when acquiring the interest and for as long as the person holds the interest. 

  • Exclusion due to continuity of activity: The rule requires that these are not shares/participations in companies through which the company has a shareholding. the same activity is carried on previously exercised, under another company or at the level of a natural person.

Requirements of the entity in which the investment is made

  • Corporate formIt must be a newly created company in the form of a SL, SA, SA laboral or SL laboral and not admitted to trading on secondary markets.

This requirement must be met for all years of continued participation.

  • Economic activityThe entity must be able to carry out an economic activity and have the personal and material means to do so. It is not allowed to have as its activity the management of movable or immovable assetsThis must be complied with for all years prior to the transfer of the holding.

  • The entity's own funds: The amount of the newly created company's own funds may not exceed EUR 400,000 at the beginning of the year in which the taxpayer acquires the units.

  • Formal requirements: The taxpayer must have a certificate issued by the entity in which the investment is made, indicating that the entity meets the above requirements in the tax period in which the units are acquired.

In order for the tax authorities to be aware of this, the newly created entity must file form 165 at the end of the financial year informing them of who has made this type of investment.

Exemption on the future transfer of such units if the amount is reinvested

As we have indicated, from the configuration of the deduction for investment in newly created entities, it seems to be deduced that it is compulsory to transfer the holdings or shares within 12 years (and not before 3 years).

However, given the certain future transfer of these assets, the tax rules themselves provide for a income tax exemption (total or partial) assets generated by the transfer of shares to those which, at the time of acquisition, the subject had applied the deduction for newly created investment, but provided that the proceeds of the sale are reinvested in other new or newly created companies.

Furthermore, it should be borne in mind that this exemption does not apply if the holdings or shares are transferred to the spouse or relatives up to the 2nd degree or if the taxpayer himself has acquired homogeneous holdings in the year before or after the sale.

2) Tax deduction for investing in start-up companies - Autonomous Communities

It should also be noted that Many Autonomous Communities have regulated similar deductions in personal income tax. for investment in newly created companies that are socially and fiscally domiciled in the Autonomous Community in question. These deductions are usually incompatible with the state deduction, so that the part of the investment applied in the regional deduction cannot be counted towards the state deduction and vice versa.

This is the case, for example, of Andalusia, which regulates a similar deduction, which amounts to 20% of the amounts invested with a limit of 4,000 euros of deduction and which in the specific case requires additionally that (i) if the investment is made when the company is set up, it must have a person with a full-time employment contract and (ii) if it is made at a later date by means of a capital increase, an increase in the average workforce of the company is required. Moreover, in both cases, the workforce must be maintained for the following 24 months. On the other hand, although the shares must also be held for 3 years, there is no maximum holding period (12 years), as is the case in the Spanish legislation.

3) Patent Box for corporate income tax purposes

Corporate tax regulations also provide incentives for the start-up environment.

Specifically, the Patent box is a tax incentive that is very interesting for technology-based start-ups. Article 23 of the LIS regulates it as "Reduction of income from certain intangible assets. "

What is the patent box?

The scheme allows a reduction to be included in the positive income generated in the company by the transfer of intangible assets equal to the following formula:

Patent box reduction formula - MERAC Legal & Tax Lawyers

It should be noted that under no circumstances may the concept of expenses to be computed include financial expenses, depreciation of real estate or other expenses not directly related to the creation of the asset.

To which operations does it apply?

This reduction is only applicable to positive income (profits) generated by the transfer of the right to use or exploit the type of intangible assets listed in the corporate income tax legislation itself, which is considered a "numerus clausus":

  • patents,

  • utility models,

  • supplementary protection certificates for medicinal products and plant protection products,

  • legally protected designs, resulting from research and development and technological innovation, and

  • advanced proprietary software resulting from research and development activities.

However, despite the attractiveness of this tax incentive, it should be pointed out that in practice, the patent box regime is indeed rigidThe DGT has been refusing its application when it understands that it is a transfer of intangibles other than those listed in the law (for example, transfer of know-how (Binding Consultation V0273-20, of 5 February) or when it understands that what is being provided are services and the use or exploitation of an intangible asset is not being transferred (Binding Consultation V3502-19, of 20 December).

4) Deduction for R&D and TI in corporate taxation

In future posts we will refer in detail to another of the key deductions in the startup ecosystem: the deduction for Innovation and Development (R&D) and Technological Innovation (IT), which can even be monetised through a "tax cheque" in the event that the tax liability is insufficient to be able to apply it.

In any case, as can be seen, there are multiple tax incentives in relation to the start-up environment that aim to encourage the development and growth of these companies, which increasingly cover more and more of the Spanish business fabric.

[1] Apart from the above, it should be noted that the "..." is excluded from the basis for deduction.the amount of shares or units acquired with the balance of company savings accounts to the extent that this balance has been deductible". However, this deduction was eliminated as of 1 January 2015, so that this limitation has no practical application at present.

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February 10, 2024
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