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How should I class my Business for Tax Purposes ?

- Updated: 05/11/2009
How should I class my Business for Tax Purposes ?

There are currently a variety of different types of company classifcations in Spain and you need to give some thought to which will suit you best for Tax purposes, aswell as for other legal and financial reasons. You should always talk to your Asesor about this and he should be able to give you the best guidance in these matters.

You are required to nominate a Registered Business Address, and quite often small Businesses will use the address of their Asesor for this. The main types of registered Business that you will come across are listed below, and as a foreigner it is unlikely that you will need to consider anything beyond these...

Sole Trader

If you are starting small and don't have a lot of capital to Invest you may wish to consider setting up as a sole trader (empresario individual). The main advantage here is that it's the simplest legal business entity. Your only financial requirements are to register for tax, IVA and social security as a self-employed worker and also for tax on your business activities. A further advantage of this is that you are not required to make a specified investment in your company. It can be whatever sum you feel is required or that you can afford.

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The main disadvantage of setting up your business in this way is that you're personally liable for all the debts of the company and, if anyone decides to sue you or your company, it could be a financial disaster for you and your dependants. If you aren't prepared to take on this kind of risk and have a reasonable amount of capital to invest, it may be worth setting up a limited liability company.

Limited Liability Company

A limited liability company is known as a " Sociedad de Responsabilidad Limitada (SL) " which is similar to a British limited company. It's the most common form of small and medium-sized company. The reasons for its popularity are it's simplicity, the relatively small investment it requires and, as the name suggests, the fact that your liability is limited if anything should go wrong or someone sues you. The disadvantage, compared with operating as a sole trader, is that you're liable for corporation tax and VAT as well as your personal tax and social security contributions.

If you start an SL, you must invest a minimum capital of € 3,005.06 and have at least one shareholder (But no more than 50) - You should work with a lawyer and a financial adviser to ensure that your company is legally incorporated and you've gone through all the required procedures before starting trading as a business.

Sociedad Limitada Nueva Empresa

A Modified version of the SL company has recently been introduced - called a Sociedad Limitada Nueva Empresa (SLNE). The idea being to encourage the incorporation of small and medium-size businesses, and becuase the fiscal requirements are simpler than those of an SL it is hoped that this makes it all the more popular. An SLNE also differs from an SL in terms of the number of shareholders (Maximum of 5) and permissible company names. The company name must comprise one of the founder’s names, a registration number and the letters SLNE (For example "Bob Smith Plumbers SLNE") The minimum capital required is almost the same as for an SL (€3,012 – all of which must be in cash) and the maximum is €120,202.

Public Limited Company

A Sociedad Anónima (SA) is the Spanish equivalent of a British public limited company (plc) and is the next most widely used type of business entity in Spain. An SA requires a much larger investment than an SL so it's usually the choice of big businesses working on major projects that wish to make an investment in Spain. The minimum investment required to form an SA is €60,101 and at least 25 per cent of that must be paid into the company bank account before incorporation. The company bylaws must then state what will happen to the remainder, including when and how it will be paid. There can be any number of shareholders in this type of company and they can be of any nationality and don't need to be resident in Spain, although they (or their professional representatives) must sign the necessary documents before a notario.

The main advantages of an SA are the exemption from personal liability for its shareholders, and the option to float the company, as shares in an SA may be quoted on the Spanish Stock Exchange (Bolsas de Valores). The disadvantages are the large investment and the complicated accounting required. Annual auditing is also mandatory, and the administration of an SA is more strictly regulated than that of an SL. Unless you have a significant amount to Invest or are planning a specific project then it is unlikely that an SA company will appeal to a foreigner.

Partnership

If you want to make your business arrangement official (and legally avoid paying corporation tax) but don't want to start a business as such, it's possible to establish a partnership (sociedad civil). There must be a minimum of two partners and, although there’s no minimum investment, they must invest an equal amount of money. They must also share the work, the goodwill and the profits equally. There’s unlimited liability for partners, again, which they must share equally. You must still pay 1 per cent of the capital deposited in transfer tax and register for tax on economic activity, register for income tax as self-employed workers and register with the social security authorities.

Small & Medium-size Businesses

Small and medium-size businesses (pequeñas y medianas empresas/PYME) dominate Spain's economy (according to the Ministry of Industry, Tourism and Commerce, 99 per cent of Spanish businesses are PYMEs), and the government encourages both their formation and their growth. As a result, many PYMEs qualify for grants, incentives and reduced corporate tax rates.

There are in fact three categories of PYME, as follows:

  • Mediana Empresa – A 'medium-size' business, with between 50 and 250 employees and an annual turnover of up to €50 million
  • Pequeña Empresa – A small business, with between 10 and 49 employees and an annual turnover of up to €10 million
  • Micro Empresa – A 'micro-enterprise' with fewer than ten employees and an annual turnover of up to €2 million

Talk to your Asesor about your Intentions as soon as you consider starting up a Business and he will be able to help you plan the most beneficial Business type to suit your needs.

Comment on this Article

 
Hi, I hope somebody can help ... I'm a U.S. citizen in Madrid on a student visa. 4 years ago I opened a S.L. as a step in changing my work status and getting my residency. I had no problem opening the S.L. but they declined my residency application and so shot down my plans to be a business owner because I couldn't prove that I had prior work experience in the sector I was trying to run a business in. During the time that I was trying to get my residency, the S.L. was in an 'inactive' status. The lawyer I hired told me that I didn't have any tax to worry about because the S.L. was not an operating business. When my residency application was rejected, I closed the business bank account that I had made the initial S.L. investment in and I figured that was that. Now in 2010, I'm still in Spain, on a student visa, without residency. Now I'm getting letters from La Hacienda saying I must file business taxes for the past 4 years. The last says that I must pay 200 euros per year or be taken to court! Is there anything you know of which address this issue? Also, can you refer me to a reputable, trustworthy legal/tax expert who can advise me on how to officially close my SL and resolve this matter so that I can stop receiving these letters? Any help or advice you can give me will be greatly appreciated.
Beckett - Sat 30th Oct 2010