On December 1, 2022, the Spanish Parliament finally approved the Law for the Promotion of the Startup Ecosystem, known as the “Startup Law“, which aims to support the creation and growth of startups, as well as to attract talent to the country.
This law introduces substantial changes, but before going into detail, it’s necessary to clarify three basic concepts that are often confused:
- Special Tax Regime for Inpatriates (from now on “Beckham Law” for simplicity): It’s a special tax regime that’s been in force since the beginning of the century. It allows foreigners and Spanish returnees to pay fewer taxes.
- Visa for Digital Nomads: immigration measures to promote the arrival of entrepreneurs and non-EU workers.
- The Startup Ecosystem Encouragement Act (from now on “Startup Law” for simplicity): the late 2022 law that, among other things:
- expands the type of profiles that can benefit from the Beckham Law.
- creates the Digital Nomad Visa mentioned above.
In other words, the Startup Law has two main sides of interest to us: changes to the Beckham Law (the tax side) and the introduction of new visas (the immigration side).
Beckham Law: How did it work until now?
Until now, any individual who acquired their tax residence in Spain as a result of traveling for work purposes (known as “inpatriates”) could benefit from the Beckham Law as long as they hadn’t resided in Spain during the previous 10 years.
This was a special tax regime aimed primarily at employees who had not resided in Spain in recent years. However, it was clearly limited, as it left out freelancers, entrepreneurs, and investors.
As we will explain in detail further in this article, the main characteristics of this regime are:
- No tax is levied on savings income (interest, dividends, and capital gains) of foreign origin.
- Income obtained in the Spanish territory is taxed under non-resident income tax.
- Income from employment is taxed at a fixed rate of 24% on the first €600,000 and at 47% after that.
Nonetheless, with the entry into force of the long-awaited Startup Law, there are really no changes to how much tax is paid under the Beckham Law.
As we’ll see now, the actual important change that has been made is who is eligible now.
How has the Startup Law changed?
These are the main changes:
- From now on, not only employees can benefit from the Beckham Law, but also freelancers, entrepreneurs, and investors living in Spain.
- The period that’s required of not having lived in Spain is reduced from 10 years to 5. This also applies to Spaniards, in a clear attempt to repatriate national talent.
- Company administrators will be able to benefit from this regime regardless of the percentage of the company they own. Until now, it was limited to 25%.
- It introduces special visas for non-EU citizens (among them, the visa for international teleworking that eliminates the need for local subsidiaries or intermediaries of foreign companies to have an employment relationship with Spain residents).
- Under certain circumstances, the spouse and children under 25 years of age (that haven’t been emancipated) may benefit from the regime.
As we have mentioned, the Beckham Law was previously very limited, since it was only applicable to employees (with few exceptions).
But this has changed. Now, foreign company workers, freelancers, and entrepreneurs can also benefit from this regime.
In other words: it’s not only irrelevant whether your employer is in Spain or not, it’s also irrelevant whether you are an employee.
- An employee of a single foreign company
- A freelancer who provides services to a dozen different companies each month
- An entrepreneur who sells goods or services directly to consumers
And precisely, in order to include those who don’t have an employment relationship with a company, the previously existing condition of not owning more than 25% of a company has been eliminated (asset-holding companies are excluded).
Tax advantages of this regime
Now, we’ll summarize the tax advantages of benefitting from the Beckham Law.
Exclusive taxation on income in Spanish territory
As long as the individual accredits their tax residence in Spain, the taxpayer will be taxed in Spain, exclusively for the income obtained in Spanish territory and not for their worldwide income.
Therefore, income obtained abroad (basically, income obtained in a country other than Spain) will not be taxed in Spanish territory, except for employment and professional income, which must always be taxed in Spanish territory, regardless of the country in which it’s generated.
This is especially relevant because a “normal” taxpayer (someone who isn’t under this regime) must pay tax on their worldwide income, i.e., they must declare in Spain the income they obtain in Spanish territory and also the income earned from anywhere in the world.
For example, a person who obtained:
- Income from work in Spain for €50,000.
- Income from work abroad for €10,000.
- Income from real estate capital abroad for €15,000.
- Foreign capital gains of €5,000.
Normally, they would be taxed on a taxable base of €80,000, whereas under the Beckham Law, they would only pay taxes on a €60,000 base (of income from work performed both in Spain and outside Spain).
Reduced income tax
In addition, the tax rates levied on the income of inpatriates under the Startup Law are lower than the maximum marginal personal income tax rates and, therefore, considerably favor higher incomes.
There are only two brackets:
|Up to €600,000||24%|
This is important because the normal personal income tax rates in Spain have a scale of six brackets (in this special regime there are only 2 brackets) in which the last established bracket taxes at the rate of 47% of those incomes that are higher than €300,000.
This means that an employed professional with an annual income of €600,000 per year would pay:
- €144,000 (average rate of 24%) under Beckham Law
- €277,000 (average rate of 45%) in the general regime*
* The Personal Income Tax (IRPF) rate depends on many factors such as the Autonomous Community, education, family situation, etc.
As you can see, the inpatriate obtains from now on a relevant tax benefit. In the previous example, they would pay almost half the taxes of another individual who obtains the same income and is taxed under the general personal income tax regime.
Capital gains and income from movable capital
As mentioned above, capital gains (dividends, share sales, interests, etc.) obtained abroad will not be taxed in Spain.
However, those obtained in Spanish territory by a person under the special regime must be taxed in Spain. And they will be taxed on a progressive scale different from the previous one, under rates from 21% to 28%, depending on the amount of income obtained.
Under this regime, wealth tax is payable, although only assets and rights located in Spain are counted.
But keep in mind that, to be obliged to pay this tax, the taxpayer’s assets in Spain must be roughly more than €1,000,000 (subtracting exemptions), so most entrepreneurs and digital nomads who move to Spain aren’t obliged to pay it.
Inheritance and donations
Inpatriates will have the status of residents for Inheritance and Gift Tax purposes.
This means that, in case of inheritance or donation, they’ll have to pay the Inheritance and Gift Tax of their Autonomous Community, for all the assets they receive, regardless of where they are located, whether inside or outside Spain.
Large Fortunes Solidarity Tax (ISGF)
As previously stated, none of the tax rules just mentioned have really changed because of the new Startup Law. Only the requirements to benefit from them have changed.
However, a new tax has recently been introduced which affects Beckham Law beneficiaries: the Solidarity Tax (MSTF).
This tax provides that all taxpayers with tax residence in Spain, therefore including digital nomads whose net worth exceeds three million euros, are subject to the tax.
This is, in fact, a not-so-known “trap” that can cause unwary wealthy professionals to move their residence to Spain and be forced to pay this confiscatory tax calculated on the total of their wealth, regardless of where it’s located.
In other words, taxpayers under the Startup Law only pay Wealth Tax with respect to their assets and rights located in Spanish territory. However, they will have to pay the wealth tax on their entire worldwide wealth.
It should also be noted that, although a net worth of three million euros isn’t very common in the Spanish context, such an amount is not uncommon for high-value-added professionals from wealthier countries who will, no doubt, think twice about moving to Spain.
Benefits for emerging companies
In addition to all of the above, the Startup Law also introduces the concept of an emerging company, a qualification that makes them eligible for even more tax advantages.
An emerging company is defined as a company that:
- Is a newly created company, or one that’s not older than 5 years (or 7 years in the case of biotechnology, energy, industrial companies, or a company that develops its own technology designed in Spain).
- Doesn’t come from structural modification operations of other non-emerging companies.
- Is located in Spain.
- Has at least 60% of the workforce with employment contracts in Spain.
- Develops an innovative and scalable project.
- Hasn’t distributed dividends and isn’t listed on any regulated market.
The National Innovation Enterprise SME S.A. (ENISA) is the agency in charge of granting the qualification of “emerging” to companies that meet all these requirements. They will be able to benefit from the following tax advantages:
- Reduction of the corporate income tax rate to 15%.
- The possibility of deferring their tax debt in the first years.
- Tax exemption for stock options of up to €50,000 per year for employees and partners.
- Raising the maximum deduction base for investment in these companies to €100,000 per year.
- An increase of the deduction rate to 50% or the commissions to the success of venture capital managers (carried interest) will be taxed with an exemption of up to 50%.
How long can I benefit from this Law?
Unfortunately, and despite some rumors that state otherwise, the maximum period that someone can take advantage of the Beckham Law hasn’t changed and will continue to be 6 years (5 years plus the year in which Spanish tax residency is obtained).
How to take advantage of it?
In short, the new Startup Law is an excellent opportunity to live in Spain paying a more reasonable amount of taxes than under the general regime.
If you’re interested in living in Spain with the advantages of the Startup Law, our tax experts can help you process the visa and the registration in the special regime for inpatriates to minimize your tax burden in Spain.
Please feel free to contact us at [email protected] or through the contact form.