Although the recent approval of the Start-up Law in the “common” Spanish territory (as opposed to the historic territorios forales of the Basque Country and Navarre) is to be applauded (see previous posts for example here and here), it is nevertheless worth noting that the Basque territories – and especially, Bizkaia – have been implementing a series of tax measures to support entrepreneurship and create an innovation ecosystem since 2021.

The three historical territories of the Basque Country (as well as Navarre) have their own tax status and tax sovereignty that allows them to adopt their own legislation. 

Through these measures Bizkaia seeks to bolster and add to its existing attractions – including its world-famous Guggenheim Museum as well as an extraordinary culinary scene – a favourable tax framework for entrepreneurs to promote investments.

The territory of Bizkaia, among other projects, has promoted its start-up and innovation ecosystem by designing, developing and constructing the pioneering B Accelerator Tower (BAT) centre in Bilbao (a public-private collaboration to launch innovative and entrepreneurial projects) and approving a package of tax regulations to shape an economy equipped for the future based on digitalisation, innovation and technology.

The tax measures are structured to provide for a beneficial treatment throughout a project’s lifecycle (including on exit) and were inspired, inter alia, by the UK's enterprise investment scheme (EIS):

• Investors receive a tax allowance equal to 25% of their investment in start-up companies, rising to 35% if the investment is made in innovative companies or silver-economy-linked start-up companies. This tax credit is not limited to individuals (as in the common Spanish territory), as it can also be used by Spanish Corporate Income Tax payers. There is no specific monetary threshold for this tax allowance, although its amount is limited to 25% of the start-up’s share capital and, therefore, the maximum amount of the credit available will ultimately depend on the size of the start-up. In addition, the investment made in the start-up company must be held for at least five years; otherwise, the tax credit will be forfeited.
• During that holding period, the investment will be exempt from Wealth Taxes (and also from Gift and Inheritance Taxes).
• On exit, individuals benefit from a Personal Income Tax (PIT) exemption in respect of 50% of any gains they realise. This exemption increases to 100% if the gains are reinvested in similar start-up interests (within two years from the transfer). In unfavourable scenarios, potential losses arising from insolvency or liquidation can be offset against general income subject to PIT under progressive PIT rates (e.g. salaries), with certain limits. Corporate investors also benefit from the participation exemption in respect of any capital gains realised on exit regardless of their percentage shareholding (while the general participation exemption requires a minimum 5% shareholding).

In terms of remuneration, it is common in the start-up context to establish incentive plans that include stock options or phantom shares. These are not considered employment income until the economic rights are effectively exercised (generally through the transfer of the underlying shares). In this case, as an extraordinary measure only applicable to start-ups, they will be taxed as capital gains at the savings rate (20–25%) and not at general rates for employment income.

Although the number of measures is extensive, we would like to make two final remarks:

• Specific PIT taxation of carried-interest has been in place in Bizkaia since 2018 (in the form of a 50% exemption). Specific tax regimes for carried interest were introduced in the territories of the Basque Country well ahead of their introduction in other parts of Spain through the new Start-up Law.
• The tax framework for expats in Bizkaia is also more beneficial than the one introduced in other parts of Spain through the Start-up Law in that it provides for a 30% exemption on expats’ employment income and applies for 11 (rather than 6) years.

Finally, a revolutionary package of new tax measures has been introduced, creating tax credits to further cultural activities (especially in the film industry). That said, it might be better to leave Bizkaia’s potential aspirations to challenge Hollywood for a future post.