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Peter Wise, Finance Director, Electronic Group Interactive S.A. (Barcelona)
Brief outline of Spanish taxation
Setting up a business
1. Main types of business
Self-employed – known as “autónomos”, registration has to be made with Hacienda (the Spanish tax authority) and the Social Security. Most autónomos have to present quarterly IVA returns (Spanish sales tax) and an annual income tax return (Renta). Other returns and declarations will frequently be applicable on a quarterly or annual basis, according to circumstances.
Limited Company – several types exist but the commonest form is the “Sociedad Limitada” or S.L. that can be set up with a minimum capital of €3,006. Though important in protecting the owner(s) from personal liability in the event of bankruptcy, its incorporation does imply a number of additional tax, accounting and mercantile obligations. In addition, in recent years the authorities are taking much closer interest in who/what is behind the company to ensure that it has a legitimate purpose and is not fraudulent. Now the shareholders need to apply for a NIE and the "administrador", or company representative, will have to prove having an address in Spain. For an EU passport holder this can be achieved without undue difficulty though adding to costs and the time required for completion. Without an EU passport the proceedure becomes more complicated.
Branch office – similar to a limited company though less formalised, this can be used by an overseas business to establish a presence in Spain and in certain circumstances can be a viable alternative to a limited company.
2. Employees and staff
Hiring employees involves a lot of paperwork (work contract, registration, social security, tax retentions, payslips and annual certificates etc) and business social security contributions are extremely expensive. So, think twice before putting staff on the payroll. Alternatively, hiring a freelancer may be cheaper but it also supposes certain obligations on the business as regards tax retentions and declarations to Hacienda. The penalties for ignoring them can be harsh.
3. Cash planning
A new business always needs more money than you think until it becomes self-financing. Prepare a detailed cash budget for at least the first 6 months and remember that credit sales mean nothing until collected - while they remain unpaid you’ll need another source of income to finance your outgoings.
4. Beware of local lawyers & “gestores”
There are thousands of “gestores” in Spain (they handle all administrative and bureaucratic red tape), all offering much the same service. However, be careful in choosing the right one because not all give good advice and most do not speak foreign languages, which frequently leads to misunderstandings and uncertainties. Most want to sign you up for a monthly fee, providing a service that may be unnecessary, plying on a foreigner’s lack of experience and knowledge about procedures and obligations in Spain.
5. Finally, talk to us to get good, independent advice. We’ll explain what sort of business entity you really need to set up and what to do about taxation, payrolls and bookkeeping. Our advice is always practical and we offer value-for-money solutions to accounting, tax and legal problems so that you can concentrate on running the business.
Brief outline of Spanish taxation
Am I liable to Spanish tax? If you spend more than 183 days in Spain you are automatically considered tax resident here, liable for taxation on total worldwide income.
And as a non-resident? Income arising in Spain will attract a 24% retention and owned property will also be taxed on the years's actual rent received or an inputed amount based on the property's tax value.
Do I have to submit tax returns? Apart from employees in very specific circumstances (and with an income below certain levels)and freelance “autónomos” with very low incomes, if you’re resident for tax you have an obligation to file an annual income tax return (Renta).
How does income tax work? All employees have a retention (I.R.P.F.) made from their monthly pay by their employer, and businesses must retain some tax from a self-employed person’s invoice. These retentions are a down payment of the annual tax bill and the resulting over- or underpayment will be declared and settled in the annual return filed in June (Renta). Current rates for the 2009 tax year start at 24%, rising to 43%, though investment income is taxed at a flat rate (19-20% from 2010).
How does IVA work? As in the UK and most European countries, a sales tax is added to the price of almost all goods and services. The final consumer bears this unless it’s a registered business that can offset the tax against the IVA it has invoiced to its own customers. The basic rate on almost everything is 16% though reduced rates of 7% and 4% also apply to certain products, and a few specific services are exempt (rates are to rise in July 2010).
Is it tax advantageous to set up a company? This will depend on the individual’s tax situation. From 2009 a company pays Company Tax (Impuesto Sociedades) at a basic rate of 25%, though the first €120K is subject to a reduced rate of 20%. Taxable income is calculated after deducting relevant business expenses and specific tax breaks from the company’s income.
Other taxes:
I.A.E (Actividad Económica) – an annual, local business tax levied on companies and businesses with a turnover in excess of €1m.
Wealth tax (Patrimonio) – low rates ranging from 0.2% to 2.5% applied in bands to the individual’s total wealth in excess of €170,000. This tax has been abolished from the 2008 tax year.
Property taxes (Impuesto sobre Bienes & Inmuebles.) – levied on property owned by non-residents and on second properties belonging to residents. There is also a local tax (Contribución Urbana) levied on the individual’s main residence and based on the official value (“valor catastral”).
Capital Gains - included with the income tax return and taxed from 2010 at a flat rate of 19-20%. However, it can be complex to calculate, being dependant on the type of asset, length of time held and the individual’s tax status and circumstances.
Inheritance and gift tax (Impuesto de Sucesiones y Donaciones) - regional tax levied on the beneficiaries of assets in excess of around €16,000 and even non-resident beneficiaries are liable when the assets or rights are located in Spain. Tax rates vary widely from region to region and exceptions apply for a spouse, child or parent.
Transfer tax and stamp duty (Impuesto de Transmisiones Patrimoniales) - applies to certain real estate and commercial transactions, such as the incorporation of a limited company. The rate starts at 0.5% (for commercial activities) rising to 6% (for real estate transactions) and is paid by the buyer or the beneficiary of the transaction.
Identity numbers
NIE (Número de Identidad Extranjera): This is your identification number in Spain though for non-EU citizens having one gives NO rights as to residency and entitlement to work. It’s needed to file taxes, set up a business and for just about any formal, oficial red tape.
DNI (Documento Nacional de Identidad): This is the ID number for Spanish citizens.
NIF (Número de Identificación Fiscal): This is the tax ID number for all individuals. For Spaniards, it's the DNI plus one letter; for foreigners, it's the same number as your NIE.
CIF (Certificado de Indentifición Fiscal/i>): This is the tax number for limited companies as issued by Hacienda as part of the incorporation process and is equivalent to the UK's Vat number. From 2010 most businesses will also need to apply for an EU tax number, essential for most EU transactions.
Número de Seguridad Social: Your employer applies for this social security number when you start your first job in Spain. This number then stays with you for all subsequent jobs. If you’re self-employed, you apply for this number yourself. OUR CHARGES: Our charges depend on the type of service provided but are always competitive and we try to accommodate them to the client’s economic circumstances:
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