Taxes on the incorporation of companies in Spain

The Spanish tax authorities are very strict and efficient and its Department of Collection (Inland Revenue) has an international reputation for the use of Information Systems (IT). Spain’s Social Security system also enjoys an international reputation. However, Spain is one of the countries with the lowest tax collection compared to its GDP (Gross Domestic Product).

How is it possible that Spain is one of the countries that collects proportionally less tax when it has: 1) Very high tax rates (25% in corporate tax and approximately 50% in personal income tax). 2) A very rigorous and competent tax collection department?

The answer is the deductible expenses. The tax/GDP ratio in Spain is 34.5%, below the average for the Eurozone (41.4%) and the EU (40.2%). The tax burden in Spain, the sum of taxes and social contributions in relation to GDP, stood at 34.5% in 2017, four points higher than the previous year, but significantly below the average of 41.4% for the Eurozone and 40.2% for the EU, as is shown in the data published by Eurostat.

Therefore, working for oneself or owning a company can sometimes be very difficult.

Due to these challenges, we have prepared a short summary of the most relevant aspects you need to know before starting a business, including the financial requirements.

Before creating a company, one must file a tax registration on form-036 or 037. But once the company is started, you must file a Form-840 for the Tax on Economic Activities. The rules of the Tax on Economic Activities stipulate the requirement of the tax on the development of the business activities of the companies.

There is a great difference between self-employment and employment for a third party regarding the taxes. In self-employment, as well as those jobs where the person is not legally represented by another, personal income tax (IRPF) is paid quarterly. In addition, entities pay corporate tax.

Self-employment

A self-employed person is one who works for his or her own production and distributes goods and services. But we often forget what a self-employed person has to do.

• A self-employed person must be registered with the Treasury Department (Ministry of Finance) before starting his or her economic activity.
• They have to present a census declaration, detailing the activity, place, and taxes that will affect their daily activities.
• As mentioned above, a self-employed worker must pay quarterly installments of income tax through direct or objective tax assessments, and at the same time, they must complete the tax return using form D-100 and are given the option to make the payment in one or two interest-free installments.

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Losses and Taxation

The Spanish tax system allows to mitigate certain income with losses suffered in certain patrimonial operations.

Legal Entities. S.A. (Public Limited Company / Stock Corporation) or S.L. (Limited Company)

The two companies are mentioned together because their financial obligations are identical.

• Before starting an economic activity, a “NIF” must be presented, using form 036. (NIF as “Numero de Identificación Fiscal” – “Tax Identification Number”).
• At the end of each year, they must register their annual income. This is the most important aspect of corporate tax because it is used to calculate the company’s tax base. Accounting records of daily transactions must also be kept for the same reason.
• Both types of entities pay corporate tax because the fiscal year coincides with the financial year; however, a fiscal year may not exceed twelve months. In addition, both entities have to pay the Tax on Economic Activities unless the company has a net income of less than one million euros.

Common characteristics. VAT (Value Added Tax)

As far as value added tax is concerned, there are similarities between self-employed workers and companies. Both follow a quarterly or monthly settlement period and will have to complete form 303.

Withholdings

Some individuals and companies will have their taxes withheld or will have a pre-established amount deposited with the Treasury Department. If there are taxes withheld from workers and professionals, they must file Form 11. In addition, they must file Form 115 when companies pay rent, that is, because their offices, buildings or facilities are rented and not purchased. Part of the rent is withheld and paid to the Treasury.

Annual return on transactions with third parties

Financial companies that carry out economic transactions, which exceed 3,005.06 euros, must also submit the application for the Form-247 in February of the corresponding year. Companies are required to submit their financial statements online and with electronic certificates, including their management reports and tax registration documents.

In conclusion, these are the highlights of the essential taxes after the incorporation of a company in Spain.

If this article has been of interest, we also suggest you to read the following article published on our website: Taxation of Collective Investment Institutions merger