Venture Capital (VC) and Privat Equity (PE) companies in Spain are already one of the preferred vehicles for entrepreneurs, investors and, particularly, family offices holding companies that havemoved their investments from listed securities and stock markets to the privatefinancial markets in search of better returns and closer control over their investments. In fact, in 2023, 38% more VCs-PEs have been recorded than the 84 recorded the previous year. Currently, there are about 432 VCs registered in Spain, well above the 310 in 2022.
As it is known, VC companies as well as PE firms main corporate purpose is to take temporary stakes in the capital of non-financial non-listedcompanies (lower liquidity) subject to a special regime (Law 22/2014, of 12 November). They have offered ample benefits in times of low interest rates –even negative ones – with enhanced capacity to raise finance, and are consequently quite rigorous when selecting target companies in which to invest.
Following the liquidations of open-ended investment companies, VC. PEcompaniesattracted the interest of private investors and family holdings. VCs can be anadvisable asset for high net worth, it must be part of the appropriate investment diversification and planning. By investing in companies that offer less liquidity, since they are not listed the returns come when the underlying assets of the VC, PE distribute dividends or upon the exit (divestment), which means somewhat larger time frames
VC, PEcompanies offer some advantages:
Attractive tax treatment for these structures.
- Tax regime of VC-PE companies.
Due to its regulatory regime, it offers exemption from corporate incometax of 99% of the capital gains in the transfer of shares representing in theirportfolio companies, temporary investments in companies across different sectors – except real estate and banking-, and provided that they are unrelated transactions and the transfers or dividends take place from the beginning of the 2nd year of holding and up to and including the 15th year.
- Tax regime of a family-owned company as shareholder in a VC or a PE company.
As is well-known family-owned companies enjoy a special tax regime. Holdings of at least 5% in a VC company by family offices with appropriate management organization with the necessary administration assets and personnel can be considered as necessary for a substance business activity as the investeeentity - the VC or the PE company - is not considered a holding, merely asset-holding entity – in this sense the Directorate-General of Taxation (DGT) has ruled that thesecurities (passive assets) included in the investment ratio requirements of a VC /PE company are considered business-related assets.
For a properly structured family office, portfolio shares in VC or PE companies can also qualify for the special tax regime for family businesses, (e.g. rebateon Wealth Tax, Inheritance and Gift Tax and exemption for donors and deferralof taxation for acquirers for Personal Income Tax purposes), apart from the exemption of 95% of Corporate Income Tax in the taxation of dividends and capital gains with respect to investees in at least 5% for at least 1 year).
Requirements.
As regards share capital required to set up an VC- PE company, -the minimum issued, subscribed share capital can be € 1,200,000 (€ 900,000 in the case of ECR-SMEs)-, according to recently enacted Law 18/2022 of 28 September on thecreation and growth of companies, the minimum paid up capital has been reduced from 50% to 25% of the issued capital.
This option also requires longer investment maintenance periods, implying less liquidity, and numerous and complex regulatory requirements with a considerable volume of reporting and transparency tasks with their associated costs (initial capital, the obligation to comply with numerous and complex regulations and investment ratios that reduce flexibility, time horizons, regular reporting obligations to the Spanish Stock Commission (CNMV), audits,reviews, etc.).
This implies an appropriate management structure, well financed with the IT equipment and human resources: a professionalized management team, capable of planning strategies, identifying targets, reviewing and studying (due diligence) and closing investments, having and managing their maintenance even in case of investments of minority packages in unlisted entities, as well as external lawyers and advisors in different fields. Still, it can be quite a good, interesting tool for high-wealth investors to invest in innovative businesses and also in businesses close to the investor's experience, accepting a mid/long time horizon for exit and realization.
Conclusion.
Establishing VC and PE companies as vehicles requires prior thorough consideration and adequate planning, beyond a generally attractive tax regime, it starts as a long-term project – and not without risks as in any business project – for investors seeking sustainable, mid-long term yield above the average.
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