- Most common alternatives for starting a business in Spain:
1.1. Direct hiring of employees by a foreign company.
This alternative is becoming more and more common for EU companies that want to expand their markets to Spain.
It only requires the registration of the company with the Spanish tax and social security authorities.
Obligation to pay payroll tax and social security contributions. Care must be taken to ensure that a permanent establishment is not created, which could generate the obligation to pay corporation tax.
1.2. Permanent establishment/branch.
A permanent establishment can be set up simply by registering as an entrepreneur with the tax authorities, or by setting up a branch dependent on the parent company. The branch office must be entered in the relevant commercial register.
Neither the permanent establishment nor the branch has its own legal personality, so it is simply a registration in Spain of the foreign company.
The advantage of a permanent establishment is that it is very easy to set up.
The disadvantage is that it does not protect the investor from insolvency, as the parent company is jointly and severally liable for all debts of the permanent establishment.
The branch must appoint at least one director, who does not have to be resident in Spain.
The permanent establishment is subject to corporation tax and has the same obligations as any other Spanish entrepreneur. For example, it must keep accounts in accordance with the Spanish commercial code and has to formulate annual accounts.
Transfers from the permanent establishment to the parent company in its country of origin do not normally incur any withholding tax, unless the parent company is domiciled in a country considered to be a tax haven.
1.3. Limited liability company (Sociedad Limitada)
The limited liability company is the most common legal form for investment and business in Spain. The advantage of the limited company is that it protects the partners from insolvency, since in the event of insolvency, the partners are only liable up to the amount of the capital invested.
The limited liability company is subject to corporation tax.
Dividends paid to shareholders resident outside Spain are normally subject to withholding tax. The general withholding tax rate is 19%, but double tax treaties provide for lower withholding tax rates (10% to 15%). If the EU parent-subsidiary directive can be applied, dividend payments are exempt from taxation in Spain.
The limited liability company can be managed by a sole administrator,
several joint administrators or by a board of directors. The board of directors must have at least three members. It is not compulsory for the directors of the company to be resident in Spain.
1.4. Public limited company (Sociedad Anónima).
The public limited company is common in the case of large projects requiring anonymous investors. The public limited company also protects the shareholders in the event of insolvency, as they are liable only up to the amount of the contributions made.
In the case of public limited companies, the rights of minority shareholders are better protected.
Dividends paid to shareholders resident outside Spain are normally subject to withholding tax. The general withholding tax rate is 24%, but double tax treaties provide for lower withholding tax rates (10% to 15%). If the EU parent-subsidiary directive can be applied, dividend payments are exempt from taxation in Spain.
The public limited company can be managed by a sole administrator, several joint administrators or by a board of directors. The board of directors must have at least three members. It is not compulsory for the directors of the company to be resident in Spain.
- Taxation of Spanish companies.
Corporate income tax applies to all legal entities resident in Spain and Spanish permanent establishment that carry out business activities, irrespective of their legal form.
2.1. Tax rates.
- 25% general rate
- 23% taxpayers with turnover of less than €1,000,000
- 15% newly created entities (two years)
- 1% certain collective investment undertakings
- 0% pension funds
- 30 % credit institutions
2.2. Deductible expenses.
All expenses related to the taxable person's business activity are allowed to be deducted from the tax base. However, there are some restrictions on the deductibility of expenses, including the following:
- Depreciation is deductible subject to certain limits.
- Impairment of receivables only if older than six months
- Interest deduction limit up to 30 % of EBITDA, with a minimum of 1.000.000€.
- Internal pension funds are not deductible.
- Remuneration of participating loans from group companies
- Expenditure on transactions with tax havens
- Provisions for impairment of equity investments in other companies
- Fines and penalties
2.3. Offsetting of tax loss carry forwards from previous years.
The offsetting of tax losses from previous years is allowed without time limit.
However, such offsetting is limited to 70% of the tax base prior to such offsetting. In any case, compensation of a minimum of 1.000.000 € is allowed.
2.4. Taxation of dividends, interests, and royalties.
Dividends paid to shareholders resident outside Spain are subject to withholding tax. The general withholding tax rate is 19%, but double tax treaties provide for lower withholding tax rates (10% to 15%). If the EU parent-subsidiary directive can be applied, dividend payments are exempt from taxation in Spain.
Interest paid to lenders resident outside Spain are subject to withholding tax. The general withholding tax rate is 19%, but double tax treaties provide for lower withholding tax rates (10% to 15%). If the lender is resident in the EU, interest payments are exempt from taxation in Spain.
Royalties paid to tax subjects resident outside Spain are subject to withholding tax.
The general withholding tax rate is 24%, but double tax treaties provide for lower withholding tax rates (5% to 10%). Royalties paid to companies resident in the EU are exempt from withholding tax, provided that certain conditions are met.
2.5. International double taxation agreements.
Spain has more than 70 double taxation treaties signed with other countries, the most relevant of which are:
- All EU countries
- United States of America
- United Kingdom
- Canada
- Chile
- Argentina
- Australia
- New Zealand
- Morrocco
2.6. Other relevant taxes in Spain.
- Value added tax. Regulated by EU-Directive.
- Payroll tax. Cost of payroll tax is borne by employees.
- Property tax. Administered by municipalities.
- Personal income tax
- Wealth tax
16 MAY 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.