Transactions June 2016

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Start-Ups and their Specific Legal Needs.

By Cristina Pardo

Non-Resident Individuals Taxation in Relation to their Real Estate in the Spanish Territory.

By David Capitán

Start-Ups and their Specific Legal Needs.

Cristina Pardo

In the current economic context, start-ups are becoming one of the principal driving forces of our economic market. However, since they are businesses beyond the traditional standards, they require a specific legal advice, which takes in different legal areas, all of them with the purpose of giving added value to their partners/managers.

  1. What are start-ups? How they operate?

Despite the growing interest in supporting the creation of start-ups, there is not a unique definition to identify this kind of business. In general terms, a start-up is a human organization with a great changing capability which develops products and/or services, either relating or not to the technological world, extremely innovative, highly wished or required by the market, whose design and sale is totally focused to the customer. Start-ups usually operate with minimum costs, but they make exponentially growing profits, have a continuous and open communication with clients and tend to mass growth of sales.

The majority of start-ups do not use traditional financing sources, such as bank financing or similar vehicles, but they opt to capital contributed by investors, such as business angels or business sponsors in exchange of a percentage in the company in such cases where the start-up has not a business model from its first years of life.

The majority of start-ups do not use traditional financing sources (…)

Similarly, another key factor of the start-ups consists of the human organization arranged by partners and collaborators. Contrary to the rest of companies, start-ups have specialized professionals with an extremely changing and market adaptation capability

  1. Legal contribution to start-ups

One of the challenges to be faced up by an entrepreneur when creating a start-up is that the creation and expansion stages will be implemented more rapidly than in a traditional business. The entrepreneur shall be obliged to deal with legal and/or tax problems related to the legal form of its business, financing advice or protection of its intangible assets. For this reason, the entrepreneur shall have a team of interdisciplinary legal advisors who must cover all its specific needs, become aware of the business model of its start-up and help it to overcome any obstacles.

  1. Legal aspects to be considered by start-ups

Firms that work with entrepreneurs principally offer legal certainty and support them throughout the different stages of growth of the start-up, usually also offering supplementary services, such as introducing the business angel or establishing synergies with other entrepreneurs. The most frequent services required by start-ups are:

(i) The entrepreneur usually thinks about the legal form its business must be vested with, particularly if the start-up has an international vocation. A prior and detailed analysis of the business model shall be essential in order to determine the most appropriate legal vehicle for the implementation of the start-up. For this, the legal advisor must take into account all key elements that define the project, such as the necessary investments for the start-up and its sources, the numbers of partners, any possible trademarks, patents and/or know-how, as well as any possible contingencies that could arise from the project and the possibilities of taking advantage of tax incentives for research and development. The most common legal forms to create a start-up are: (a) individual businessman– freelancer; (b) capital company; (c) civil company; or (d) cooperative company.

(ii) During the creation process, the terms and conditions of the Partners’ Agreement are usually negotiated, which are agreements signed by partners with the purposes of regulating the internal relationships governing the company. Partners’ Agreement play a fundamental role when establishing the essential guidelines relating to: (a) the good governance of the company (e.g. to establish reinforced majorities for certain decisions or the composition of the Board of Directors), (b) separation and incorporation of partners (this point is very important within the future investors framework); or (c) the establishment of solutions against deadlock situations which may imply a risk for the start-up (e.g. the casting vote of the chairman or to condition any issue to a third party’s approval).

(iii) As referred above, the start-ups need funds as a fundamental step to initiate and implement their development. Therefore, the start-ups tend to use external investors, which usually imply a situation of new investing partners joining the business. The legal advisor shall give advice to the entrepreneur on participating and convertible loans, as well as on the negotiations of the different financing rounds, if any.

Another purpose of the legal advice is to protect the industrial secrets (…)

(iv) The legal advisor of the start-up shall also give advice on its daily activity by preparing the necessary commercial agreements, the adequacy of the web page to the personal data protection and/or e-commerce.

(v) Another purpose of the legal advice is to protect the industrial secrets or know-how of the start-up. To this end, the lawyer shall carry out all internal measures (e.g., to limit the access to confidential information from certain employees or to establish contractual clauses of confidentiality and non-competition) and the necessary external measures of protection (e.g., subscription of non-disclosure agreements).

(vi) In turn, in order to avoid any setback that may affect the feasibility of the project, the establishment of mechanisms to protect the industrial and intellectual property shall be also fundamental.

(vii) Similarly, it is recommendable to have the collaboration of a lawyer for the drawing-up of employment contracts with the purpose of avoiding any problems relating to, among others, social benefits, labour conditions, trainees and other employment relations in the start-ups.

In Bartolome & Briones, SLP we have a specialized team in giving advice to entrepreneurs and start-ups, which is nourished from professionals of the principal areas of the firm (commercial, IP, tax and labour) to offer a specific and wide-ranging service covering all stages of the project, from their incubation to their implementation in the market. The foregoing results in a broader and more comprehensive knowledge of the needs of our clients, which are always observed both from the point of view of the external professional and the closer and more sensitive perspective of the internal peculiarities of the businesses we are giving advice to.

Non-Resident Individuals Taxation in Relation to their Real Estate in the Spanish Territory.

David Capitán

Non-resident individuals usually own properties located in the Spanish territory. Such properties may be aimed either at the use and enjoyment by their owners or the obtaining of profitability by leasing or selling them. The internal Spanish regulations regulates the obtaining of such income by non-resident individuals, whereby they are obliged to pay the Non-Resident Income Tax (for their holding, lease and/or sale) and the Wealth Tax (for their holding). The purpose of this article is to briefly summarize the taxation of these two taxes for non-resident individuals owning properties located in Spain.

We summarize the applicable taxation of both taxes below:

  1. Non-Resident Income Tax

The Non-Resident Income Tax (hereinafter referred to as IRNR) is a direct tax that charges the income made in the Spanish territory by non-resident entities and individuals, i.e., the tax obliges such non-resident taxpayers, but subject by a real obligation. Non-resident individuals shall pay taxes each financial year in the IRNR exclusively for the income made during such year which may be considered as obtained in Spain.

IRNR is a direct tax that charges the income made in the Spanish territory (…)

A case of income obtained in Spain is the one generated by holding properties located in the Spanish territory. In this case, taxation may apply in two different ways:

  • Leased property located in Spain: this case implies taxation of the IRNR for the lease income obtained in Spain. Taxation on this income shall be of 19 per cent for resident individuals in the EU, Iceland and Norway (deduction of expenses related to the income being allowed) and of 24 per cent for the rest (deduction of expenses not being allowed). The tax payment shall be made during the first twenty calendar days of the months of April, July, October and January by filing the Form 210.

  • Property located in Spain at the disposal of its owners: holding of a non-leased property but at the disposal of its owners generates a fictitious tax income subject to taxes, called real estate income taxed. The amount of such income shall be 1.1 per cent or 2 per cent of the cadastral value of the properties, depending on the year when such cadastral value has been reviewed. Taxation of such income shall be of 19 per cent for resident individuals in the EU, Iceland and Norway, and of 24 per cent for the rest (neither of such cases allowing any expense deduction). Tax payment shall be made during the next calendar year after the accrual tax date (31 December of each year) by filing the Form 210.

    1. Wealth Tax (IP)

The Wealth Tax (hereinafter referred to as IP) is a direct tax of a personal nature which charges the equity owned by individuals. Taxation in Spain is for a personal obligation (for individuals with their usual residence in the Spanish territory) or for a real obligation (for non-resident individuals but who may be holders of assets and rights located, which may be exercised or which must be perform in the Spanish territory).

Filing of the tax shall be mandatory, provided that any of the following circumstances may arise:

  • The tax liability is due to be paid.

  • Or, otherwise, the value of the assets or rights, determined pursuant to the applicable tax rules, is higher than 2,000,000 Euros.

In the event of a real obligation to pay taxes, the final tax liability is obtained from charging the net tax base by the following tax rates:

Net tax base(up to Euros) Tax liability(Euros) Rest of the net tax base(Up to Euros) Applicable rate

(percentage)

0.00

0.00 167,129.45 0.2 167,129.45

334.26 167,123.43 0.3 334,252.88

835.63 334,246.87 0.5

668,499.75

2,506.86 668,499.76 0.9 1,336,999.51 8,523.36 1,336,999.50 1.3

2,673,999.01 25,904.35 2,673,999.02 1.7

5,347,998.03 71,362.33 5,347,998.03 2.1

10,695,996.06 183,670.29 onwards 2.5

  1. Capital Gains from Real Estate SalesHowever, given that this tax is fully assigned to the Autonomous Communities, they are authorized to establish minimum amounts exempted (in Catalonia, a minimum exempted amount of 500,000 Euros has been established, while in Madrid is of 700,000 Euros) and allowances (in Madrid an allowance of 100 per cent of the tax liability has been established, while in Catalonia no allowance has been established).

The capital gain generated under the transfer of a property located in the Spanish territory shall be subject to the IRNR. Pursuant to this tax, the transfer of a property located in Spain generates two tax obligations clearly differentiated for the transferor, of the one part, and for the acquirer, of the other. We describe both obligations below:

3.1. Taxation for the Non-Resident Transferor:

Transfer of a property located in the Spanish territory by a non-resident individual shall generate a capital gain subject to the IRNR. In general terms, this capital gain shall be determined by the difference between the transfer value and the acquisition value, in both cases the deduction of the necessary expenses being allowed. The applicable tax rate shall be of 19 per cent. The tax payment shall be made within a term of three months after the term of three month as of the transfer date (accrual date) of the property by filing the Form 210. A 3 per cent withholding of the sale price that the Resident-Acquirer shall be mandatorily obliged to pay may be deducted from the tax payment, which is detailed in the following section. If such withholding paid were higher than the payable tax liability, the Non Resident-Transferor may ask for the refund of such excess paid.

3.2. Tax obligations for the Acquirer:

Transfer of a property in the Spanish territory by a non-resident individual shall generate a withholding obligation for the Acquirer, either resident or non-resident in the Spanish territory. The Acquirer shall be obliged to withhold and pay to the Treasury 3 per cent of the consideration agreed. As stated in the paragraph above, this amount shall be considered as payment on account of the IRNR for the Non-Resident Transferor. The Acquirer shall pay the withholding by filing the Form 211 within a term of one month as of the transfer date and shall be obliged to hand over a copy of such Form to the Non-Resident Transferor.