Although
the venture capital sector in Spain has grown rapidly
since the government introduced some tax concessions
in 1999, there has been a heavy concentration on mature
firms, and Spain has traditionally had one of the smallest
shares of venture investment in seed and start-up enterprises
among OECD countries.
The
major share of private equity investment goes to expansion-phase
companies, which typically account for 60% to 70% of
both capital invested and total deals.
Spain has had difficulties channelling venture capital
investment to early-stage companies. Returns from companies
in these stages are generally perceived as too low relative
to their more mature counterparts, particularly given
their risky and illiquid nature.
The
current investment culture in Spain does not tolerate
a high number of failures in a venture fund. According
to a December 2003 OECD report, there is a need for
capital gains tax incentives to be introduced for individual
investors if these problems are to be overcome.
The government indeed
improved the CGT regime in its Law 62/2003 in December
2003, and perhaps as a result, figures for 2004 showed
a more promising picture, with 55% of Spanish VC investment
directed towards early-stage financings.
Qualifying
Preconditions
To qualify
for the fiscal benefits that attach to Spanish venture
capital funds a corporate entity must meet the following
criteria:
- Minimum Share Capital:
The VCF must have a share capital of a designated
amount, of which at least 50% is paid up on incorporation
with the other 50% is paid up within 3 years.
- Assets:
60% of the VCF assets must be either participating
shareholdings in target companies or shares in other
companies.
- Administrative Approval:
To qualify for the special fiscal regime a VCF must
obtain prior administrative approval and must register
itself both in the Mercantile registry and with the
Ministry of Economy & Finance.
Further
information on the venture capital regime in Spain can
be found on the Spanish Venture Capital Association
website.
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Fiscal
Incentives
VCF enjoy
the following fiscal regime:
- Corporate Income
Tax: Dividend income remitted by target
companies to the VCF is exempt from corporate income
tax in the hands of the VCF. Spanish corporate income
tax stands at 30%.
- Capital Gains Tax:
Any capital gains made by the VCF on the profitable
sale of shares in target companies are 99% exempted
from capital gains tax in Spain provided the shares
have been held for a period of 3 -10 years. Spanish
capital gains tax stands at 30% (capital gains are
taxed at the corporate income tax rate). If the sale
of shares occurs outside this period there is no relief
from this tax. This regime was considerably improved
by Law 62/2003 in December, 2003.
- Withholding Tax:
Outgoing dividends (and other profit distributions)
remitted by the VCF to its shareholders are exempt
from withholding taxes.
Spanish
venture capital regulations were updated in 2005/06.
For further information on the effect of these updates,
please see here.
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