Spain’s Share Option Plan: The Rules and The Benefits

Share options rules reform at heart of Spanish government’s new startup-friendly plan

Spain has adopted new legislation that seeks to overhaul the taxation regime governing startups in that country, with a liberalisation of rules and regulations surrounding stock options one of the key features of the plan.

The Government’s “startup law” – formally introduced into law on January 1^St this year – contains a raft of measures designed to help liberalise the tax and red tape environment for new and young companies, with a view towards moving Spain to the forefront of the European Union as an attractive location for investors, entrepreneurship, and talent.

A key pillar of the overall plan is an overhaul of the current rules on stock options for companies that meet eligibility criteria specified in the legislation.

Previous rules for share options

Previously, under the terms of the Spanish Personal Income Tax Act, all employees granted stock options faced a potential tax bill at the point of exercise and also when shares were sold on.

When an individual exercised their options, they were taxed on the difference between the strike price agreed at the time the options were granted and the fair market value of the shares when they were formally acquired. So, if an individual was granted an option to buy 200 shares in the company at a strike price of €10 and exercised that option later when the stock was valued at €15, the tax liability was calculated on the difference between the strike price and the stock price at the moment of exercise – €5. (For illustrative purposes only.)

However, income derived from the exercise of stock options up to the value of €12,000 in any calendar year was deemed to be exempt from taxation, as long as certain conditions are met e.g., options were granted on the same terms to all employees.

Also, whenever any individual sold their shares, they were liable for capital gains tax.

Changes implemented under the “startup law”

The first point to make clear on these changes is that they are targeted very specifically at startups, i.e., new and young companies. Businesses that grant options to employees, but don’t meet the eligibility criteria will continue to operate under the rules set out above.

The criteria companies must meet in order to be deemed eligible to benefit from the new rules, include:

• Annual revenues of up to €5 million
• At least 60% of employees based in Spain
• No more than five years old (seven years for companies in certain sectors, e.g., biotech and energy)
• Independent from other companies, i.e., an entirely standalone entity
• Not listed on the stock market
• No dividends distributed
• Must be designated an “innovative” company by the SME National Innovation Company (Empresa Nacional de Innovacion SME – ENISA)

Once companies satisfy these points, they would be eligible for all elements of the overall plan.

Among the key adjustments on how stock options will be handled are:

1. There is no longer a taxable event at the point of exercise. Instead, tax only becomes due when the shares are subsequently sold or if the company becomes a publicly listed entity, whichever happens first. In the event that neither of those scenarios take place, provision is made in the legislation for tax to fall due 10 years after an individual acquires the shares in question.
2. The annual €12,000 tax exemption limit on the value of exercised shares has been increased to €50,000 – a rise of well over 300%.
3. There is now greater flexibility on the rules governing the creation of treasury stock in limited liability companies.
4. Companies have been granted more leeway in terms of who they wish to involve in an options plan, i.e., eligibility for favorable tax treatment no longer requires that all employees are offered the same terms.

Among other measures in the legislation, designed to foster a pro-entrepreneurial, pro-innovation, pro-individual talent, and startup-friendly environment, are:

1. The rate for Corporate Tax and Non-Resident Income Tax has been reduced from 25% to 15% for the first four years after taxable income is first recorded.
2. Provision has been made for the deferral of Corporate Tax and Non-Resident Income Tax payments (for 12 months and six months, respectively) during the first two years in which taxable income is recorded.
3. The maximum deductible amount for investments in new or young companies has been raised, going from €60,000 to €100,000 on an annual basis, while the rate itself has also been increased – from 30% to 50%.

Stock options vs Pensions

These changes underscore how stock options have become much more attractive than personal pension plans in recent times. Even before the “startup law” proposals were unveiled, the appeal of options had increased by virtue of previously announced changes in the Spanish personal pension taxation regime.

The General State Budget Law for 2021 and 2022 significantly reduced the tax deduction benefits on offer for pension plans – the ceiling fell from €8,000 to €2,000 last year and dropped to €1,500 this year. Arising from this, many individuals are now looking at alternative approaches to secure their financial future or top up their income.

Against that backdrop, and even more so in light of the expected changes coming in the near future, now is the time for companies to look at introducing share option plans for employees, with any such initiative likely to serve the needs of both companies and workers.

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JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.​