The Spanish government most recently published and released a new set of laws and incentives for Startups. These new legislations help a category of startup companies that get funded and their investors to a certain extent, however, they are a far cry from making Spain attractive enough for startup founders.
In my view for Spain to become an attractive heaven for Startup founders and for the country to attract talent and innovation to happen in Spain, it needs to rethink more and change some very basic fundamentals laws.
I have spent 22 out of the 26 years of my working life here in Spain and I have been a startup founder from day 1, so below are the points that I bring up as issues I found as an entrepreneur while running my businesses.
A) Social Security
When I first started, I worked the first few months charging cash. It was a test period before I could see which idea works and of course if it works. During this time, I was of course working in black. The cost of getting registered in Social Security and paying a fixed fee every month, when I was not even earning anything some months was simply unrealistic. In business terms, I would have either had to not do it, or think otherwise.
Currently, Spain offers a lowered social security fee for a six months period which gradually increases over time, irrespective of whether you have started earning enough or not.
The result is that a %age of the workforce never registers in the system simply because the numbers don’t work out, for them. Or they are afraid of having to pay the continuously rising fee even if they don’t earn for one month or two.
If only the Spanish government could realize that by reducing this fee to zero for those months that you earn zero and charging only relevant to your income per month, they would see a huge change in the people who will be willing to move back into the system. A system that charges fairly and provides fairly.
The recent changes in Social Security charges increase the fee for those who earn more but does not decrease the fee for those who earn less. A totally unfair and to say the least unattractive proposal for any startup founder(s) who will generally go without pay for one or more years.
B) Hacienda & Taxes
While the new incentives are primarily geared towards startups that receive funding and incentives to bring investors to Spain, it completely misses one major point. The fact is that 9 out of 10 startups never get funding and that these are the majority of companies and the number of people who start. The legislations need to change to help these founders.
These legislations should include:
- Tax relief for all new companies. It is very simple. If all new companies/startups are allowed to reinvest their income tax (VAT) of their first few years back into the company, it would make a huge difference. It would reduce the need for funding, it will increase the runway for the company, and will increase its chances of survival.
- Acceptance of all invoices and costs. The Spanish tax office (Hacienda) does not accept any invoice/cost that could have a double use. Let’s take for example the costs of a car, petrol, and repairs. As a self-employed or new company, the law requires that you have a specific car, modified, signed, purchased, and purposed or rented for the business. If the car is in your name. You cannot claim the costs of travel for business or visiting clients. You are expected to use public transport, taxis, or buses.— — This is insane. As a startup, you need to cut costs, and use your own car, house, garage, and kitchen to get things started at minimal costs. If you cannot account for these costs which are a direct result of a business activity then there is an imbalance. This pushes many entrepreneurs to avoid getting registered, and stops company formation, it is a total killer for any startup.
C) Government incentives
During the years I was starting Urbytus, I applied for many grants and funds. In all cases except one, my application was rejected for all help and incentives. There were so many restrictions and requirements in place that I would almost invariably fail to meet one or another requirement. The Spanish government spent more money on staff reviewing and ensuring you don’t get the fund than helping startups.
— For one, I started Urbytus as an in-house project. This was not acceptable, it was not considered as a new project or idea, and hence all requests for funding were denied.
— When we did register as a separate company, we were denied funds because the company was making a loss. It seems that there was a lack of understanding about startups in general. Startups rarely generate income or profit in the first few years, what is so hard to understand about this.
— And for some of the other grants and help, we had to use only specific companies, hand-picked by the government, or be in a specific program or location to benefit from those incentives.
Startups grow in garages, and government and local authorities should make it easy for these companies to flourish, and start in garages and homes. Early expenses generated in these environments should be allowed as costs.
Rather than spend so much money to control the use of the funds and incentives, which bears a high cost in administration personnel (WASTED MONEY) these incentives should be more fluid, and faster to dispense, with fewer restrictions.
Let me give one simple example if each local authority suggests that they will pay the setup fee for any company that opens a shop/office in their area, irrespective of it is a startup or not, it sets to create an economic boom. It will bring companies to that area, it will increase expenditure in that area.
In the UK and the US to setup a company you are looking at a cost of around 100GBPor 100US$ (or even less) in Spain it is around 1000Euro (or more). 10 X more expensive.
In UK/US you can file your general expenses. In Spain, you can hardly file any expenses.
In Spain, the Social Security is so high that many of the startup founders I speak to are unsure of if they should setup the company when they should and the majority decide to delay it until they have enough income.
If only the government officials in Spain (and around the world) could see that implementing fair Social Security with fair fee policies across the board and not just for specific sectors, they will see a higher rate of legal workers, leading to a similar if not higher revenue plus a society that will change towards working legally.
If only the Tax legislations change to accommodate and accept direct expenses generated by or for business activity in a fair proportion they will set to gain more than the current system where the society prefers to keep it in the black.
If only the system understands and tackles the issues that affect the starting point and early years of startup founders, only then will it see a rise in startup companies, and only then will it truly attract startup founders to start businesses in Spain and setup their operation and fully register from day one.
Until then, Startups will come and go, unregistered. Taxes will be paid or not, and many entrepreneurs may decide to outsource services to avoid IVA (VAT) or even request to pay in black. A blow to the Spanish economy and its startup ecosystem.