Just under a year ago, Law 28/2022, of 21 December, on the promotion of the start-up ecosystem, better known as the Start-up Law, was passed. This law was created with the aim, for the first time in Spain, of regulating and establishing a regulatory framework to support the creation of what are known as start-ups. The Law regulates many different points but does not establish, in detail, the certification procedure, which is why, for several months, we have had a Law that has been approved and in force, but most of its points had little or no applicability.
Last July, Order PCM/825/2023 of 20 July was published, regulating the criteria and procedure for the certification of start-ups that give access to the benefits and specialities recognised in the Startups Act. This Order has been received with great enthusiasm as it is what has really opened the procedure for applying for recognition as an emerging company.
With this publication, I intend to provide a more didactic summary of the procedure that startups will face in their attempt to achieve certification as an emerging company.
1.- Spanish Startups
According to Article 3 of the Startups Act, a start-up company is defined as any legal entity that meets the following requirements:
(i) “Be newly created or, not being newly created, when no more than five years have elapsed since the date of registration of the public deed of incorporation in the Companies or Cooperatives Register, in general, or seven years in the case of biotechnology, energy, industrial and other strategic sectors or companies that have developed their own technology, designed entirely in Spain…”.
With regard to the first requirement, we must therefore understand that it will only apply to those entities that are registered in the Companies or Cooperatives Register, leaving out entities such as Associations and Foundations.
(ii) Not have their origin in a structural modification (merger, spin-off or transformation) of a company that is not a start-up in accordance with the Law. It is expressly specified that the concentration or segregation is understood to be included in the above. However, nothing is said about global transfers of assets and liabilities as such, I do not know whether this is an error or because they may be understood to be included in the above, nor what should be understood by concentration, a very broad concept that may give rise to interpretations.
(iii) Not distributing or having distributed profits (dividends and/or returns). On this point, and specifically in relation to article 204 “Resolutions subject to challenge” of the Capital Companies Act, I wonder what would happen in the event that a start-up company that is already certified distributes dividends, in addition to the loss of the status, could it be challenged as being contrary to the Law that is or was applicable to it?
(iv) Not listed on a regulated market. In my opinion, by limiting it only to regulated markets and thinking of the Spanish markets, I understand that the start-up company could perfectly well be listed on the BME Growth, also known as the market for small and medium-sized companies.
(v) Have its registered office, registered office or permanent establishment in Spain. In other words, there must be a legal-tax link, but the door is not closed to entities incorporated under the laws of other countries being able to apply.
(vi) Have 60% of the workforce with an employment contract in Spain.
(vii) It must carry out an entrepreneurial project that is innovative and has a stable business model. This is precisely the point that the Empresa Nacional de Innovación, S.M.E., S.A. (ENISA) will assess in accordance with Order PCM/825/2023, referred to above.
(viii) When the applicant belongs to a group of companies in accordance with Article 42 of the Commercial Code, Article 3.1 in fine of the Law establishes that the group or each of the companies that comprise it must comply with the above requirements. It will be interesting to see how it is interpreted on this point, as it may happen that a group as a whole meets, for example, the requirement of 60% of the workforce in Spain, but that some of its individual entities do not. It is not clear to me from the wording of the Law whether it should be interpreted as meaning that the requirements must be met by the group or, alternatively, by each of the companies, or whether, on the contrary, each of the companies must always meet the requirements.
As a negative delimitation, Article 3 section 3 of the Startups Act stipulates that are not eligible for the benefits of the Act:
– Those companies that are founded or managed by themselves or by an intermediary, and which are not up to date with their tax and social security obligations.
– Those who have been convicted by final judgement for an offence of unfair administration, punishable insolvency, corporate offences, money laundering offences, financing of terrorism, offences against the Public Treasury and Social Security, offences of prevarication, bribery, influence peddling, embezzlement of public funds, fraud and illegal exactions or urban planning offences, as well as those sentenced to the loss of the possibility of obtaining public subsidies or aid.
– Those who have lost the possibility of contracting with the Public Administration.
2.- Criteria for assessing the innovative and scalable nature of a venture
In my opinion, this point is the most relevant because, a priori, what we should understand by innovative can be somewhat subjective or diffuse. Article 3.2 of the Law expressly states that a company will be considered to be developing an innovative entrepreneurial project “…when its purpose is to solve a problem or improve an existing situation through the development of products, services or processes that are new or substantially improved compared to the state of the art and which entails a risk of technological, industrial or business model failure“.
Regardless of whether we agree more or less or whether we understand that an innovative venture can be something more, the challenge behind this definition is to know what objective elements will be taken into account to assess it and how this will be done. Article 4.3 of the Law establishes that in order to assess the degree of innovation and scalability, the analysis will be based on at least the following criteria:
- Degree of innovation, having received public aid and investment in R&D&I.
- Degree of attractiveness of the market, assessing supply and demand, traction generation and recruitment policies.
- Life phase of the company, assessing the implementation of prototypes, obtaining a minimum viable product and bringing the service to the market.
- Business Model, assessing scalability in terms of number of users, operations or turnover.
- Existing competition in the market.
- The team that makes up the company, its experience, training and track record.
- The relationship of dependence with suppliers.
- The clients.
- Reputational, regulatory, ethical or speculative risks.
Of course, these criteria are useful to get an idea of what elements will be taken into account when assessing the application made. However, what was missing was some more objective precision that would allow entrepreneurs to determine whether their project or business could be classified as innovative with respect to this law.
It is the above-mentioned Order that has provided a little more clarity in objectifying the qualification of innovator. In this sense, Article 4.3 lists a series of conditions which, if met by the company in question, the requirement of innovative character must be understood to be fulfilled. Specifically, they are as follows:
- R&D&I expenditure must account for at least 15% of the company’s total expenditure over the previous two years or, in the previous year, if the company is less than two years old.
- Having been the beneficiary of public investment, financing or aid to develop R&D&I or innovative entrepreneurship projects in the last three years without having been revoked.
- Have a reasoned report on their high degree of innovation issued by the Ministry of Science and Innovation.
- Proof of Social Security contribution bonuses for having hired research personnel.
- To have an Innovative SME Seal of Approval.
- To have a Young Innovative Company Certification, a Small or Micro Innovative Company Certification issued by AENOR or a Certification in accordance with the UNE 166.002-R&D&I Management Systems standard.
In the event that any of the above conditions are not met, section 4 of the same article establishes that the innovative nature will be assessed taking into account whether the company has a presence of technological innovation that may be protected by industrial property rights or other rights such as protected software or know-how and the presence of innovation in products, processes, services and/or business models.
Finally, Article 5 of the Order specifies how the degree of scalability of the company will be assessed, referring to the criteria established in Article 4.3 of the Law and recognising in section 3 the direct approval of scalability if the company has signed a credit policy with ENISA in the last three years and it is still in force.
3.- Certification Procedure
Once the Law had been approved, the regulatory development was still pending to establish how the application and certification procedure for emerging companies would be carried out. Article 6 of the aforementioned Order regulates the certification procedure.
(i) The procedure shall be initiated by submitting the application for certification electronically via the following link on the ENISA website: https://www.enisa.es/es/certifica-tu-startup/info/proceso-de-certificacion
The following documents must be attached to this application:
– Documents accrediting the company. On this point, and in the case of trading companies, we understand that a certificate from the Mercantile Register showing the company’s details could be enough.
– The Tax Identification Number (N.I.F./ C.I.F.).
– The deed of incorporation of the entity.
– The closed annual accounts for the last financial year, with the seal of the Commercial Registry or the signature of the Administrative Body.
– Certificate of being up to date with tax payments.
– Certificate of being up to date with Social Security payments.
– The following Declaration of Compliance with articles 3 and 6 of the Law.
– The Business Plan.
(ii) Once the procedure has been initiated, ENISA shall have a maximum period of three months to resolve and notify, if applicable, its status as an emerging company. However, the period may be suspended in accordance with Article 22 of Law 39/2015 of 1 October.
(iii) ENISA may refuse certification where it believes that the Business Plan presents reasonable doubts of potential reputational, regulatory, ethical or speculative risks.
(iv) ENISA may use facts, data or documentation not provided by the company for its assessment. In this case, ENISA must give the interested entity a ten-day hearing.
(v) In the event that the three-month period expires without an express resolution, the company’s application may be deemed to have been accepted by positive administrative silence in accordance with the provisions of Article 4.2 of the Startups Act.
(vi) When the decision is upheld, the corresponding certificate of emergent enterprise will be issued.
(vii) An administrative appeal may be lodged against the granting or refusal decisions. This appeal may be lodged within one month of notification with the body that issued the decision or with the Directorate-General for Industry and Small and Medium-sized Enterprises. The decision on the appeal must be issued and notified within three months and the administrative silence will be negative. The resolution of this appeal will put an end to administrative proceedings and open the door to contentious-administrative judicial proceedings.
4.- Loss and monitoring of emerging status
The aforementioned requirements must be met not only at the time of application but also once the company has been certified as an emerging company and for as long as it wishes to maintain this certification. When these requirements are no longer met, ENISA will initiate an ex officio procedure to cancel the certification, notifying the affected company and giving it a hearing. The appeals mentioned in the previous point may also be lodged against the decision to annul the certification already granted.
The emerging company is obliged and responsible for immediately notifying ENISA of any modification that implies a breach of the requirements. However, at the same time, ENISA, either ex officio or through different administrations, may establish a system to warn of non-compliance with the requirements that would entail the loss of the emerging status.
5.- Main benefits
The main benefits, among others, of being certified as an emerging company are:
(i) Corporate income taxation at 15% in the first tax period in which the company has a positive taxable income and in the following three tax periods.
(ii) Possibility of requesting deferral of payment of the tax debt corresponding to the first two tax periods in which the tax base is positive. The Treasury will grant this deferral, with a waiver of guarantees, for a period of twelve and six months, respectively, from the end of the deadline for payment in the voluntary period.
(iii) Pursuant to Article 8.2 of the Startups Act, they are not required to make instalment payments under Article 40 of the Corporate Income Tax Act and Article 23 of the Non-Resident Income Tax Act.
(iv) Individuals who are neither resident nor Spanish nationals will not have to obtain an N.I.E. to invest in emerging companies; a tax identification number will suffice. In my opinion, this advantage should be extended to any company, regardless of whether it is emerging or not. The need to obtain an N.I.E. is a brake on foreign investment in Spain and it does not make any sense to make individuals whose only connection with Spain will be to invest go through this procedure.
(v) The General Meeting of Shareholders of the emerging company may authorise the acquisition of treasury shares up to a maximum of 20% of the share capital for the purpose of delivering them to its directors, employees or other collaborators in order to implement a remuneration plan. This advantage is very interesting since in Limited Companies, specifically in Article 140 of the Capital Companies Act, it is not allowed to acquire treasury or own shares in order to remunerate employees, administrations, etc. and, certainly, it has been a requirement of Startups to remunerate and link their employees to the business.
(vi) Reduction of deadlines at the Commercial Registry.
(vii) Shareholders’ Agreements of limited companies that are emerging companies shall be registrable in the Commercial Register and shall enjoy publicity if they do not contain clauses that are contrary to the law. Clauses in the articles of association which provide for the ancillary obligation to subscribe to the shareholders’ agreement, or the provisions thereof, shall also be registrable, provided that the content of the agreement may be known to current and future shareholders.
(viii) Certified companies are not liable to be dissolved for losses that reduce the net assets to less than half of the share capital, provided that no application for insolvency proceedings has been made and three years have not elapsed since incorporation.
(ix) Promotion of controlled test environments or Sandboxes for certified companies.
(x) Reduction of guarantees for obtaining subsidies.
6.- Conclusions
As we can see, the procedure for granting start-up certification is not at all complex and some of the advantages granted by such certification are very interesting. Although the legislator could have been a little more ambitious, the truth is that for a start it is not bad, but of course, many of the advantages need to be extended not only to certified companies but also to more traditional businesses that do not involve innovation, but which would benefit greatly from them.
The Order has recently been approved and, despite the wave of applications that ENISA has faced in August, there is still some way to go to see how they are resolving the applications, the red lines and what are actually the crucial elements that they are assessing.
This article includes general information and it does not provide professional or legal advice.
