20% reduction for starting a new business: criteria for application in 2023 and 2024

The transition from working life as an employee to exercising an economic activity on one's own account brings specific tax benefits. One of the most relevant issues is the application of the 20% reduction on positive net income for starting an economic activity, a benefit that has raised doubts regarding its duration and application conditions.

What the DGT has resolved

The Dirección General de Tributos (DGT) has analyzed the possibility of applying this reduction in the 2023 and 2024 tax years. The criteria establish that the 20% reduction on positive net income is applicable in the first and second tax periods in which it is positive, provided that no economic activity was carried out the previous year.

However, the regulations impose a limit to prevent the use of this benefit by those who maintain a previous economic dependency. The reduction is not applicable if more than 50% of the period's income comes from an entity from which employment income was obtained in the year prior to the start of the activity. In the case consulted, applicability in 2023 and 2024 is confirmed as there were no earnings from the same payer in the previous year and income from entities where one was an employee did not exceed 50% in the second tax year.

What this means for you

If you have decided to undertake business and move from being an employee to being self-employed, you are entitled to a tax reduction in your first two periods with positive income. However, you must monitor the source of your income. If the majority of your current billing or income comes from the same entity that previously paid your salary, you could lose this right.

What you should do

It is fundamental to perform a detailed monitoring of your income composition during the first two years of activity. You must verify that the relationship between income from your former employer and your total income does not exceed the 50% threshold. Assessing each particular situation with documentation of income and employment earnings from the previous year is necessary to determine the correct application of Law 35/2006 and Law 58/2003.