A couple of days ago, the Senate in Spain cleared a new bill for fiscal reform for the country. After several years of empty promises to entrepreneurs, companies and the general population, the government is finally lowering taxes.

Personal gain taxes will decrease from 21% to 19% in 2015 and sink to 18% in 2016. Additionally, corporate taxes will also decrease from 30% to 28% in 2015 and then 25% the following year. This should be good news for the startup ecosystem, but there seems to be a kill switch hidden within the bill.

More specifically, Section 7, Article 95:

1. When the taxpayer looses such status after a change of residence, his capital gains will be established as the positive difference between the market value of the shares or shares of any entity whose ownership corresponds to the taxpayer, and its acquisition value, provided that the taxpayer has been a Spanish resident for at least ten out of the fifteen tax periods before the last tax period and meets any of the following circumstances:

a) That the market value of the shares that paragraph 3 refers to jointly exceeds 4,000,000 euros.

b) If paragraph a) isn’t met, then that when the date of accrual of the last tax period is reached, the percentage of shares in the entity is greater than 25% provided that the market value of the shares mentioned in paragraph 3 of this article shall exceed 1,000,000 euros.

Essentially this means that an entrepreneur who changes tax residence to outside of the EU and holds more than 25% of their startup with a company value of over €1 million will have to pay taxes on the difference between the acquisition value and the current market value of the shares.

If this bill reform passes in Congress, which seems highly probable, the Spanish startup ecosystem will suffer a severe, even deadly blow. Goodbye to ambitions of getting US investment or relocating to the United States.

The Spanish startup ecosystem is slowly growing and major international VCs have only recently started to invest in the country. Passing a bill such as this will likely kill the new trend, which has potential of taking Spanish companies to new heights.

Disclosure: Venture.Watch Research is a brand from Press42, a company owned by Tech.eu co-founder Alex Barrera.

Most startups grow because they’re able to relocate to more fertile grounds. This means relocating to specific startup hubs such as London, New York, San Francisco, LA, Singapore or Shanghai. The tax reform bill will make moving, not impossible, but incredibly expensive to do so. Spanish startups will need to keep permanent residence in Spain along with all its associated tax and corporate implications.

Not only that, many foreign VCs require startup management teams to relocate closer to its office. For example, that was the case for companies such as SocialBro (London) or, more recently, RedBooth, whose management team is now based out of New York. One has to wonder if, knowing this, international VCs will be less willing to invest in Spanish companies in the future.

Well-known entrepreneur and Fon CEO Martin Varsavsky, who has been one of the first to condemn the move by the Spanish government, told us in a comment:

The biggest problem in Spain right now is its 45% youth unemployment. The only solution to this crisis is new job creation. The past year has been promising with an unemployment rate that not only stopped rising, but then began shrinking.

Now, with this new law, the government will deeply hurt the startup economy. This law is suicidal for the government, especially here, in the European Union, where we have freedom of mobility.

Why would anyone start a company in Spain and be forced to pay phantom profits in the case they want to leave when there are great alternatives, such as the UK, which offer freedom of movement? (Because the tax is paid when you leave – and not when you actually make profit – as a startup entrepreneur, you would probably not have the cash and, therefore, be forced to stay.)

To be honest, I’m not sure which is worse: The continuous uncertainty regarding taxes in Spain or that the government is now passing laws that could chain entrepreneurs to a dragging boulder and kill, as Martín said, any future for our youth.

I think what best describes the situation in Spain is beautifully articulated by Luis Martín Cabiedes, one of Spain’s top investors:

To do a startup or invest in Spain has always been difficult… now it’s either heroic or irresponsible.

Featured image credit: Duc Dao / Shutterstock