If you are thinking about starting up in business in Spain, you need to think carefully about the implications from a compliance point of view.
Many people get carried away, starting up a project they are passionate about without taking the necessary time to carry out research into the Spanish environment or even without seeking professional advice.
Europe has been working towards harmonization for several decades now; however, individual countries can take quite different approaches to the amount of compliance obligations imposed on businesses.
Once you have considered the options available to engage in business in Spain, if you have concluded that self-employment is the best way for you, this is what you should expect:
Before you start trading, you need to inform the tax office that you will be commencing a business activity. This is done via a census return; in that document you will inform the tax office of the following:
- Name, address and identification number
- Date of commencement of trade
- Description of activity to be carried out
- Whether your activity is subject to VAT or falls under one of the special categories
- The type of profit calculation and taxation system applicable to your trade (some trades fall within business modules that are taxed at fixed rates regardless of volume of business)
- Whether you are obliged to present quarterly returns on your profits to date
- Whether you have business premises, and if so disclose full details
- Whether you will be importing or exporting and as such wish to be registered on the EU traders list
It is essential that you do register before any activity takes place, even before you start generating sales, as any expenses incurred prior to registration will not be tax allowable in respect of your business profits. You are also obliged by law to notify the tax office of your commencement of trade on the first day of your activity. If you fail to do this you may be subject to a fine.
The second element of your registration is to notify the social security office of your commencement of trade, and register as a self-employed individual. From the moment you register you will be liable to pay your monthly national insurance contributions.
Ensure you are well informed before commencement
Many of the surprises and frustrations arising when starting in business in Spain for the first time arise due to a lack of awareness regarding the local compliance system. Make sure you have understood all the aspects that are relevant to your particular trade before you start; this will be the best way to ensure a trouble free commencement. Much of the information included on our website: www.roseandclavel.com aims to tackle this issue and hopefully should answer many of your questions. However, if in doubt always ask, as obtaining quality professional advice will play a key role in your chances of success.
You may be interested to know that there are governmental organizations which have implemented programs designed to support many different initiatives, such as self-employment, employment creation, innovation, equal opportunities, business improvement and growth. There are a number of grants that may be applicable to your particular circumstances. Throughout the year there are opportunities to apply for some of these grants.
In the case of individuals who are considering becoming self-employed, for some types of grant it is important that any grant application is made prior to the commencement of trade.
As an individual, you are not obliged to maintain records which include a balance sheet. Your minimum obligation is to maintain records of all your sales and business expenses; in a way that meets the required standards. Of course, even though you are not obliged to maintain a balance sheet, you may benefit from it as it will help you manage your business more effectively. In particular, if the volume of transactions is high and you either buy or sell on credit.
Withholding tax on your sales
In some instances, your corporate clients will be obliged to withhold some of your fees which will then be paid over to the tax office as income tax on your behalf. Let’s consider a simple example:
|Your Invoice €
||Your agreed fee
|VAT @ 16%
||Output VAT on your sales
|IRPF @ 15%
||Your income tax deduction
The standard rate of withholding tax in Spain for professional sole traders is 15%, however, during your first two years you may opt for 7% retention instead. Beware, for start-ups with a high volume of costs, this option will help your cash flow availability and thus your chances of success. However, if your cost base is low, opting for the 7% will lead to greater payments on account when the quarter comes to an end. Our advice is that if your profit margins are high and you are have difficulties setting money aside to pay your taxes, it is better to suffer a 15% retention as any balancing payments due will inevitably be lower.
As any other business you will need to report to the tax office on a quarterly basis by filing the relevant returns including VAT, IRPF or informative returns. In addition to the general obligations that apply to all businesses, regardless of their legal form, you may be obliged to file a return disclosing your accumulated profits for the current year. Meeting the deadlines set by the tax office is essential as any late filing will lead to a fine and interest charges.
Income Tax payments on account
Generally, when a profit has been made, you will need to pay the tax office 20% of these reported profits as a payment on account of your personal income tax. This may come as a surprise if you were used to making payments on account in your home country only twice a year. However, you may appreciate the benefits of this system as you are less likely to face large tax bills on an annual basis. A simple example of your quarterly tax return would look as follows:
|Quaterley Return €
|Profit to date
|20% on account due
|Reductions suffered to date
Once the year has come to an end, you will have to file a personal income tax return. This return will combine all of your sources of income, including your business profits, and all of the tax reliefs you are entitled to as any other resident individual.
When your final tax liability for the year has been ascertained through this process, you will either have to make a balancing payment or request a tax refund.
A balancing payment will arise if your tax liability is greater than any payments on account already made through the system noted above. Bear in mind that the maximum payment on account suffered will have amounted to 20% of your business profits, and that the higher earners in Spain are taxed up to 43%.
A refund may be requested if the withholding tax suffered exceeded your liability once other reliefs, such as mortgage costs, have decreased your taxable base leading to an effective rate of tax below 20%.
When the time comes to discontinue your business activity it is necessary to inform both the tax office and the social security authorities. Should you fail to do so, these organisations will expect you to continue to comply with your obligations, and as such, if you don’t manage things correctly, fines and penalties may arise.
Even when you have deregistered correctly, you will still remain responsible for submitting the annual summary and informative returns due in the first quarter of the year following the termination of trade.
It is always advisable to seek professional advice prior to deciding how to go about doing business in Spain. The more you understand the system the more likely it is that you will not suffer the frustration commonly suffered by many new businesses. As well as avoiding potential barriers and problems for your business, you will ultimately increase your chances of succeeding with that idea about which you are so passionate, here in the sun!