Spain's digital nomad visa, broken down
Spain has passed a new law that covers both digital nomads (remote workers) and startups.
I want to take this opportunity to look at some specific aspects of the legislation.
Governments can pass policies hastily or thoughtfully. Whether laws relate to taxation, immigration, or the criminal code — they are essentially levers that governments pass to influence human behavior.
A tax subsidy for solar panel installations is like a government saying "we want more solar panels installed in our country".
Spain is clearly trying to attract entrepreneurs and let remote workers know they are welcome.
This isn't just a cultural change. It's encoded in the tax law. How does a 15% tax rate sound (at both/either the corporate or the personal level)?
Governments can do all kinds of things with fiscal policy and marketing, but you know they're really looking to make something more attractive when they lower taxes.
A tax rate of 15% for digital nomads is like "hardcore sales". It's more tangible than a billboard above a highway interpass that says Consider Spain For Your Next Remote Work Vacation... ("softcore marketing" — nice, but not necessarily offering anything specific)
Tax rates between 0% to 15% in remote work locations around the world will presumably be enough to make thousands of people in North America, the UK, and elsewhere think hard about their 30-40% tax rate, inflating living costs, and colder winters.
Most people aren't hardcore libertarians, chasing the lowest tax rate in the world as their top priority in life. Other factors like family, community, and familiarity come into play.
But I have a feeling the upcoming Great Recession of 2023 and 2024 will likely push more people into remote work relocations. People who didn't necessary want to make a change, but determine they have to make a change.
Something cultural and ingrained will snap — and the idea of living life somewhere else at half the cost will just start to make sense — even with the inherent upheavals a relocation causes.
Let's look at some of the key aspects of Spain's law:
Startup-Related Items in the Law
New Spanish legislation defines a startup as a company less than five years old or seven years old in the case of biotech, energy, and industrial businesses, and new or emerging, meaning the company has not merged with or spun off from an existing firm. The following are requirements for a startup
Startups must be considered innovative. The company must be attempting to solve a problem or improve an existing situation.
The company must be accredited for its status as 'emerging' by ENISA, a new agency created to evaluate ventures.
Corporation tax will be reduced from 25% to 15% for up to four years for startups.
Tax deferrals for startups and digital nomads will also be available, along with 12- and six-month tax deferrals for nonresident income tax (IRNR) for digital nomads.
The startup law expands the maximum deduction base for startup investment (from €60,000 to €100,000 per year) along with the rate of deduction (from 30 percent to 50 percent). Similarly, 60 percent of a company's workforce should have employment contracts in Spain.
Startups will be disqualified from the law's benefits if they are acquired by nonemerging companies, if their annual turnover is over €10 million, if they have significant environmental harm, or if any partners with a 5 percent share are convicted of a crime.
It is illegal for a startup to distribute dividends or dividend-like instruments for a period of time. (Dividends are a form of reinvestment of profits that favor shareholders' financial interests over workers').
Digital Nomad-Related Items in the Law
Digital nomads who stay less than 183 days and earn income elsewhere will be able to pay non-resident income tax (IRNR) rather than regular income tax (IRPF). This tax has been reduced to 15% for digital nomads.
The law establishes a visa for remote work that allows non-EU citizens to enter and work for a year. This can be extended several times again, up to five years.
My take on Spain's strategy
The business of law-making is never perfect. All kinds of pieces of legislation are the end result of the conflicting needs of various interests, constituents, and stakeholders.
I don't know exactly what went into the political horse-trading on Spain's digital nomad visa law.
But I think there is a minor flaw in its construction — combining startup and venture creation with remote work.
Conflating these two things is an easy mistake. Digital nomads are 'entrepreneurial types' who travel around and create value — why can't they come to our country and create value here if we give them incentives to do so?
The problem is, the next generation of remote workers will almost certainly not be freelancers or entrepreneurs.
The promise of creating a 'local Silicon Valley' has been the white whale of so many municipalities and regions around the world looking to revitalize their economic activity.
I would encourage lawmakers not to conflate the 'tech venture creation' economic imperative with the 'remote worker attraction' imperative.
Startup founders are increasingly looking to build fully decentralized companies. Just because they move somewhere to optimize their personal tax situation (or lifestyle, etc.) — it doesn't mean they will lease a commercial office and create a bunch of local jobs.
But instead of trying to assume that incorporating new companies in a jurisdiction is the best place to grow jobs in a jurisdiction — I think regions should treat the CEO/founder/venture investor as an entirely different category and attract remote workers on their own terms.
Some remote workers are entrepreneurs. Many entrepreneurs are remote workers. But most remote workers are not and never will be entrepreneurs.
Nations, regions, and jurisdictions should act accordingly.
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