The laws and regulations that entrepreneurs and investors need to know in 2023

“The startups law is going to be a real game changer for innovative entrepreneurship in Spain […] in terms of talent and investment.” This is according to Francisco Polo, High Commissioner for Spain as an Entrepreneurial Nation, who, during the BBVA Open Summit Madrid 2022 summarised the impact of the new regulation, which is eagerly anticipated by entrepreneurs and investors alike.

Six months later, the Law for the Promotion of the Startup Ecosystem is now a reality after coming into force just before the end of 2022.

As summarised by José María Baños, founding partner of Letslaw, an international law firm that provides advice to startups, its creation represents support for the development of any emerging company “by establishing a series of tax advantages or benefits that take into account its special condition.”

To be considered a startup, Spanish law stipulates that they must meet several requirements simultaneously: be less than five years old (seven in the case of biotechnology, energy and other strategic sectors), not come from the spin-off of other companies, not be listed on the stock market, not exceed an annual turnover of five million euros and be an innovative project with a scalable business model.

BBVA Spark, a unit specifically designed to support these companies with comprehensive products, also positively values the arrival of this regulatory framework. “The approval of the startups law means the opening of new opportunities and a boost to the entrepreneurial ecosystem. At BBVA Spark, we will contribute to support all those projects with an outstanding growth potential and that are committed to innovation and technology as tools for change,” says Verónica Ruiz, head of BBVA Spark in Spain.

Keys points regarding the Spanish startup law for entrepreneurs and investors

In order to encourage entrepreneurship and attract investment, the law takes into account some important measures aimed at promoting the development of the startup ecosystem.

Benefits for startups

• Reduction of up to 15% of the tax rate during the first four years in which the taxable income is positive.
• Establishment of a one-stop shop for streamlining procedures and certification of companies.
• Improvement in the tax treatment of stock options (a way of remunerating employees through shares or salary participations).
• Visa for digital nomads to reside or work in Spain for five years, including a special tax regime.

Benefits for investors

• Specific tax treatment for the ‘carried interest’, the remuneration that venture capital entities obtain for successful management.
• Elimination of the requirement to obtain a foreigner’s identification number for non-resident investors in Spain.
• Increase in the maximum deduction base for investing in start-up companies (from 60,000 to 100,000 euros per year), as well as the deduction percentage (from 30% to 50%).

Legislating for startups, a continuous improvement

In an ecosystem where the word flexibility is integrated into the roadmap of startups from the beginning, designing standards and measures that enable their evolution and protect their activity is a big challenge. For this reason, although experts value the arrival of this type of regulation positively, they are aware that there is still room for improvement.

Daniela Leal, a lawyer specialising in startups and venture capital at the law firm Ejaso, argues that it is necessary to continue working to improve Spanish startup law in order for the country to boost its competitiveness. She highlights the so-called ‘exit tax‘, a tax levied on individuals or legal entities that cease to be tax residents in a country. According to José María Baños, of Letslaw, he believes that the incorporation of companies could be further simplified to speed up the creation of companies.

Laws for startups: a common approach for the whole world

Having and knowing those regulatory frameworks that understand the special characteristics of the entrepreneurial ecosystem is an added advantage for its development, explains Daniela Leal.

“These types of laws serve, first and foremost, to avoid or mitigate the impact of penalties or consequences of regulatory non-compliance. Secondly, to take advantage of the benefits provided by the regulation and, thirdly, as a matter of legal certainty, which generates a higher volume of business and greater investment,” she explains.

The approach crosses borders. In Europe, the New European Innovation Agenda aims to improve access to funding for startups and to attract institutional and private investors, as well as to enable innovators to implement their ideas in ‘sandbox‘ mode (controlled test environments).

In Latin America there are also different regulations to boost emerging companies.

Five years ago, Argentina approved the Entrepreneurial Capital Support Law, with benefits for both investors and entrepreneurs. On the one hand, it created the Trust Fund for the Development of Entrepreneurial Capital (FONDCE), which allocates funds to co-invest with the private sector in growth projects. And, on the other hand, it established that fund managers can carry out procedures such as the registration or the issuance of certificates on behalf of investors, among other things.

A year later, in Mexico, the Law to Regulate Financial Technology Institutions was approved in 2018, thanks to the notable prominence of the ‘fintech’ ecosystem in the country. Among its highlights is the creation of the figure of Financial Technology Institutions, which serve to connect people seeking financing through tools such as crowdfunding or to publish the investment requests received. Subsequently, at the end of 2022, the Confederación Patronal de la República Mexicana Ciudad de México (Coparmex CDMX) (Mexican Employers’ Association), proposed a specific Entrepreneurship Law to boost the creation of companies with lower bureaucratic costs.

More recently, Chile approved the Fintech Law, which establishes a regulatory framework for certain technology-based financial services, including areas such as crowdfunding. In addition, it creates an Open Finance System (Open Banking) and recognises the use of cryptoassets as means of payment.

Continuing in Chile, Sergio Eguiguren and Lucas Marinovic, of the law firm Barros & Errázuriz, are also at the helm of B&E Impulsa, a programme launched to advise and provide legal mentoring for Chilean startups. Eguiguren points out that “it is more costly for entrepreneurs to worry about legal issues at a more advanced stage than to do so from the beginning“. Marinovic adds that “it is important to know the legislation when dealing with investors when it comes to raising capital.”

Regulating technology entrepreneurship 

Far from the benefits and improvements that laws for startups can bring, the creation of new regulations also opens a relevant debate: Can they halt innovation?

Legal expert Sergio Eguiguren supports the need to create regulations for startups, as long as the requirements do not scare off entrepreneurs and investors. “Regulations are beneficial, but if there is too much regulation there is a risk that entrepreneurs will spend more time worrying about complying with regulatory requirements, rather than being focused on their business,” he explains. Daniela Leal, of Ejaso, adds: “We must not forget that any invention or innovation is only useful to the extent that it is at the service of human beings.”

Debates aside, supporting entrepreneurship from a legal standpoint is a stimulus for entrepreneurs and investors to create and support new businesses and, ultimately, for startups to have sufficient tools to scale their projects.