why reducing corporation tax the first few years doesn’t help

The Government has presented, after a long time promising to do so, the draft of the startup law. The objective of the law is to promote the creation and relocation of this type of companies in Spain, making our country an attractive place to attract talent and investment.

The sector eagerly awaited this new law, since there are multiple complaints about the difficulty of creating new companies in Spain. And you have to keep in mind that there are studies which indicate that the creation of new jobs is carried out mainly in new companies and not in already established companies.

The measures of the law

Although what is presented is a preliminary draft, which may be modified in Congress and the Senate, the master lines they are clear and there will not be many variations.

On the one hand corporate tax is reduced from 25% to 15% during the first three years that a startup has benefits. This is the star measure of the plan, since it carries an associated cost.

The taxation of the income tax of non-residents is also favored, a rescue of the Beckham law, reducing this taxation to 15%, and favoring the settlement in Spain of the so-called “digital nomads”.

It is also favored the tax regime for stock options, raising the exemption from 12,000 to 45,000 euros per year. The taxation of these stock options was one of the biggest criticisms in the industry.

What’s more, investment in this type of company is favored, raising the maximum base of the deduction from 60,000 to 100,000 euros and the rate of the deduction from 30% to 40%.

By last some administrative procedures are improvedAs well as the possibility of making installment payments of corporation tax, the obligation to enter the identification number of foreigners for non-residents is eliminated and the procedures for the dissolution of a company are facilitated.

The star measure: reduce corporate tax

Within the battery of measures, the Government especially highlights that of reduction of corporate tax. Going into detail about this measure, the reduction would be applied in the first fiscal year that the company obtains benefits and during the following three fiscal years. On the other hand, this measure would be applicable as long as the company continues to be classified as emerging.

Living from a government whose flag is raising taxes and spending, this measure seems like a great gesture. However its effectiveness is in question. It is not what the sector asked for and needs.

The reality: this measure does not help the creation of startups

For a newly created company, reaching profitability in itself is a real challenge. The difficult thing is to grow fast enough before the capital runs out. And once you get to profitability the problems could almost be said to have passed.

Helping these companies once they have reached profitability, with a reduction in corporation tax, is useless. The problem is the path to profitability, and it must be remembered that as long as the company is not profitable, As long as you do not have benefits, you do not pay corporation tax.

The problem of starting startups is mainly bureaucracy and labor costs. The bureaucracy of creating a company is not mentioned in the bill, except to facilitate the arrival of international investors.

On the other hand, the reduction of labor costs, via reduced social contributions or with special minimum wages or outside the agreement, is neither expected nor expected. And that is where the sector needs help, in costs that it really has to face in the first years, the hardest. They don’t even think about corporation tax at first.

But of course, it is easier to change the law by touching the corporate tax, which leaves a beautiful photo, than to facilitate the procedures to create companies or to subsidize social contributions during the first years, which would have a significant cost since it would affect all companies newly created. The corporate tax measure will only affect companies that manage to be profitable.

The Government, therefore, errs in its proposal. You should listen more to the industry and really understand what are the problems that prevent the creation of companies in Spain. Hopefully the process in Congress and Senate will improve the law but I am skeptical.

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