New Portuguese regulations for startups and scaleups
Portugal is a fertile ground for startups and scaleups, fostering an environment that supports innovation and growth. The country’s commitment to fostering entrepreneurship has created a supportive ecosystem for these ventures.
Law no. 21/2023 of May 25th which entered into force on March 26th, 2023, establishes a new framework for startups and scaleups by amending the Personal Income Tax Code, the Tax Benefits Statute, and the Investment Tax Code. It introduces key definitions/concepts for startups, scaleups and business angels. Rules governing the recognition and termination of the legal status of startups and scaleups must be implemented by a Decree of the Portuguese Government, in this case, Decree no. 401/2023 of December 4th.
How to obtain the startup / scaleup status
Decree no. 401/2023 specifies that startup legal status requires prior notification to Startup Portugal – the Portuguese Association for Promotion of Entrepreneurship – through an e-form. The submission must include the company’s identification, commencement of activities, number of workers, business volume, and evidence that the company hasn’t emerged from a larger corporation through transformation or a spin-off.
Within a maximum of 5 days from the e-form submission, the startup/scaleup should receive a digital certification acknowledging its status, valid for three years, further extended for an additional three-year term upon confirmation by Startup Portugal.
Startup Portugal retains the competence to periodically verify that the criteria are for maintaining startup or scaleup status.
The legal status of a startup or scaleup can terminate in two ways:
- If the company fails to meet the necessary criteria and reports such event to Startup Portugal within 30 days, or
- If Startup Portugal detects the lack of any of the essential prerequisites that led to the initial status recognition.
Upon identifying any alterations, Startup Portugal notifies the company of its intention to withdraw the startup or scaleup status, with the termination taking effect upon notification. Subsequently, upon finalizing the assessment, Startup Portugal informs the entity and reports this decision to the Portuguese Tax Authority.
In cases where false statements are provided or if the information submitted does not align with the company’s actual status, Startup Portugal reserves the right to cancel the startup/scaleup status.
The benefits
This new regulation also aimed to promote investment in and development of the Portuguese startup ecosystem. For that purpose, some tax incentives were created to increase the country’s attractiveness.
As for the Personal Income Tax Code, the taxation of stock option plans for startup’s employees now ensures that taxation occurs when the actual income is effectively earned. Additionally, it is foreseen that the income that comes from the participation of the employees in the stock option plans will now be taxed only over 50% of its amount and will be taxed at a flat rate of 28% if the stock option has been held for at least one year, with the option to aggregate such income to any other income received that is taxed at progressive tax rates.
The following are also considered to be taxable events:
- Disposal of shares or gift of shares or equivalent rights; or
- Loss of tax resident status in Portugal;
The assessment of taxable income relies on the specific taxable moment outlined in Law no. 21/2023:
- In case of disposal of the shares, the income will be determined according to the positive difference between the sale’s proceeds and the price paid by the employee;
- If the employee receives the shares free of charge, the taxable income will be considered by the positive difference between the amount that would be subject to Stamp Duty and the price paid by the employee;
- If the employee ceases to qualify as a tax resident in Portugal, the taxable income matches the positive difference between the assets fair market value and the price paid by the employee;
Another tax measure defined by Law no. 21/2023 of May 25th is that these tax benefits do not apply to employees who own more than 20% of the company and to board members and other corporate governance bodies.
This new regime applies to Portuguese companies that qualify as micro, small and medium-sized companies and those operating in the innovation sector, irrespective of their size. One of the most positive aspects of this new regulation for startups and scaleups is that if these entities have their plan approved by December 31st, 2022, they can retroactively benefit from the new startup and scaleup legal framework.
Final remarks
Regulation plays an important role in shaping the landscape for startups and scaleups, providing a framework that can either hinder or foster innovation and growth. In Portugal, the evolution of regulations regarding startups and scaleups has been a key focus in the past few years, aiming to create an environment conducive to entrepreneurial endeavors while ensuring sustainable development and competitiveness in the global market.
Introducing new regulations such as Law no. 21/2023 reflects Portugal’s commitment to fostering a good ecosystem for startups and scaleups. By offering financial support, streamlining administrative processes, promoting collaboration, and ensuring ethical considerations, these regulations aim to propel the growth and success of innovative ventures.
However, ongoing evaluation and adaptability are crucial to ensure that these regulations effectively nurture and sustain the entrepreneurial spirit in Portugal.
Our Corporate Law and FinTech teams are available to assist your company in implementing a stock option plan and accessing tax benefits.
Disclaimer
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