Guide to tax incentives for investments in StartUps
Equity Crowdfunding
Equity Crowdfunding is a private alternative investment that exists thanks to the internet and allows users of crowdfunding platforms to invest directly in companies.
When a company goes public, the growth that generates the most profitability to its investors has already happened. Investment crowdfunding allows you to keep up with the growth of companies with potential that can still generate three-figure returns.
Investing in newly created companies implies uncertainty about future profitability and even the capital itself. Thanks to tax incentives or this type of investment we can mitigate this uncertainty.
Tax incentives for investing in Equity Crowdfunding (Spanish Fiscal Resident)
For the purposes of Personal Income Tax (IRPF) in Spain, it is a complex regime where part of the taxation will be determined by the Autonomous Community where the taxable person resides. Thus, different Autonomous Communities have introduced deductions to encourage investment in new or recently created entities (start-up).
The Personal Income Tax Law establishes a deduction of 30% of the amounts used to subscribe to shareholdings in newly created entities, with a limit of €60,000 per year.
If some type of regional deduction is made for the same concept, the state deduction base should be reduced, i.e., the state and regional deduction cannot be applied on the same amount.
Therefore, an investment of €10,000 in the shareholding of a start-up hould entail a tax saving of €3,000 on the income tax declaration
Essentially, the requirements are:
- The investment in the entity must occur within its first three years.
- The investment must be held for a minimum of three years.
- It cannot be a control investment.
- The entity must carry out economic activities.
- The entity's own funds must not exceed €400,000 at the time of the investment.
- The entity must certify that it is in compliance with the requirements.
Likewise, there is a personal income tax exemption on the capital gains generated in the transfer of shares in these entities provided that the amount obtained is reinvested in shareholdings of another start-up. For partial reinvestments, the exemption will be partial.
If you wish, you can check the full law at the following link:
Deals that interest us (Quickers & Investors) typically satisfy the following minimum criteria:
- Very early-stage startups (ideally a company not yet legally created)
- Our sweet spot for initial investment is in the range of €50K to €300K
- With these considerations, we are involved as a single party in a small round
- Focus on Technology, Environmental Sustainability, Social Impact.
- Some level of customer traction and market validation in the form of existing sales
- A product or service which would satisfy the needs/wants of the target market. The entrepreneur valuation should be based on reasonable assumptions
- Had successfully identified at least 1 FTE (Full Time Equivalent) with the needed skills and time to successful follow the Quickers Incubation Program (QIP)
- Management of key positions filled and with clear delineation of who the next hires would be combined with strong domain knowledge. The management should be able to clearly identify the sales/marketing channels they will target as well as typical customer acquisition costs