The nature of startups in relation to research, development and innovation (R&D&I) tends to be highly innovative and entrepreneurial. Startups are usually composed of small, highly specialised teams that focus on developing new and disruptive products or services. These companies tend to be very dynamic and are constantly looking for new ways to improve their products and expand in the market. In addition, startups are often in constant interaction with the academic and scientific world, and often have a strong research and development component in their activity.
R&D&I is a fundamental activity in business, as it enables companies to create new and improved products and services, develop innovative technologies and remain competitive in the market. R&D&I usually involves a strong component of scientific and technological research and is usually carried out by highly specialised teams. In addition, R&D&I is often supported by public and private bodies that promote technological development and innovation in the business environment, and a way of doing it is through tax incentives.
The tax incentives that may apply to startups in Spain are Social Security rebates and tax deductions. It is important to note that it applies directly to the tax payable and not to the taxable amount, which considerably reduces the amount of tax payable. However, in order to be able to apply for these tax incentives, one must first have the Innovative SME seal.
Innovative SME
The innovative SME seal is a distinction awarded by the Spanish Ministry of Industry, Trade and Tourism to small and medium-sized enterprises (SMEs) that meet certain requirements in terms of innovation. The innovative SME seal is awarded to companies that demonstrate a high level of innovation in their activity, either through the creation of new or improved products or services, the development of innovative production processes or the incorporation of advanced technologies in their activity. Companies that obtain the Innovative SME seal can access a series of benefits, such as participation in training and education programmes, promotion of their products and services at national and international levels, and the possibility of accessing funding and subsidies to boost their innovative activity.
What are the social security benefits for research personnel?
Social Security bonuses for research personnel are a type of incentive that allows a 30% reduction in common Social Security contingencies for workers who exclusively carry out R&D&I activities. Hence, the cost for the company is 30% less. The workers must be included in contribution groups 1, 2, 3 and 4 and the contracts may be indefinite-term, for work experience or for a specific project or service. Any type of entity can benefit from the bonuses for research personnel immediately, as it is activated as soon as it is notified to the Social Security. The main requirement is that the person dedicates at least 85% of their working day to this activity, whether it is technological innovation or R&D. Even though many people think of people in laboratories when we talk about R&D&I, technological innovation comprises any activity that has a subjective novelty for the company, the area, the sector or the project itself.
Furthermore, if this benefit applies to more than 9 employees a report must be submitted. This report must include a description of the projects in which the subsidised employees have been working. Since this task is not easy, our financing team helps start ups to justify this incentive by preparing the report.
In order to provide greater guarantees, this report must necessarily be accompanied by a technical qualification report issued by an ENAC-accredited certification body. This accreditation, thus, provides certainty to all interested parties, guaranteeing acceptance of these reports in a very high percentage. Once the technical qualification report is obtained, a detailed opinion is requested to the ministry of science. Finally, the detailed opinion is presented to Social Security before the 30th of June of the next year in order to support the Social Security deduction obtained.
How can Startups reduce their tax burden?
Tax deductions for R&D&I are an instrument in the form of a tax incentive that is applied to corporate income tax in arrears and is aimed at companies that are investing in research, development, and technological innovation. This aid is regulated by RD 1432/2003 and has currently become one of the most popular incentives for both SMEs and large companies.
Moreover, these incentives can only be fully compatible if the company has the Innovative SME label, as mentioned previously. Hence, this incentive allows recovering some of the expenditure you have incurred during the tax year not only in the form of cash but also in the form of a tax credit so that you pay less corporation tax in the future.
In order to apply for this incentive, an application report of the compliance of R&D&I activities for the purpose of obtaining tax relief is required. It needs to be elaborated in the same year, by the end of the year at the latest and has to explain the project, the expenditure you have incurred, the team involved in the project among others. In addition, an ENAC-accredited certification body needs to issue a technical qualification report based on a detailed opinion.
Moreover, the ENAC-accredited certification body must certify if the project is R&D, if it is IT or if they have full-time research staff, which is usually subsidised staff. Depending on the rating given by The ENAC-accredited certification body, the return that can be achieved with R&D&I tax incentives is 12% for technological innovation activities and up to 59% for research and development activities. In other words, if you have a 1M expenditure in 2021, you can get back 599k if it is certified as R&D or 120k if it is certified as an innovation activity.
Once you have the report with the resolution of the ENAC-accredited certification body, you need to make a decision on whether the tax incentive is applied as a tax credit, hence the process finishes here, or in the form of cash. This last strategy will be appropriate if the deduction base is large enough to make the return attractive after subtracting the 20% toll charged by the tax authorities and the fees for obtaining the reasoned report for each of the projects.
In addition, you have 18 years from the time you carry out the R&D&I activities to benefit from the incentive in the form of a tax credit, but if what you need is immediate liquidity the tax authorities will pay you 80% of the deduction that corresponds to you, as long as you meet a series of conditions.
If you meet these conditions, a reasoned report must be requested to the ministry and presented in the corporate tax return of the following year. Hence, the expenses of 2021 will be certified by the end of 2021 and presented to the corporate income tax of 2021. Then, a reasoned report must be requested, which will be granted in 2022. Finally, in July 2023 the monetization will apply and the money from the expenses will be received by January 2024. This delay between the request and the receipt of the money is the main disadvantage of the tax deduction. For that reason, a good alternative is the Tax Lease.
The Tax Lease, also known as Tax Equity, is a financial instrument that combines tax deductions for R&D&I with private investment. It is a tool that allows companies that carry out R&D&I projects to obtain partial funding for them and at the same time offer a very interesting return for the financing companies. This return can double the ratings applied in the tax deductions, hence, up to 50% for R&D and 24% for innovation activities. The main advantages of the Tax Lease, as opposed to tax deductions, are not only that they monetize faster, almost double and there is no penalty for that monetization, but also that it is compatible with social security benefits for research personnel even without the innovative SME label. Although it is a very complex financial instrument, we have an experienced team that will be more than happy to help if you are interested.
