Freelancing in Spain
Spanish law provides that anyone who engages in commercial activity can do so either on an individual basis or rather in the name of a company. If it is in the name of an individual, then everyone is called a freelancer or a self-employed person.
As you may know, the two models are not the same: the self-employed or freelancer (autónomo) and the company limited by guarantee. What is the difference between them? Which model allows you to pay less tax? For your information, here is a guide to the differences between the two models:
The difference between a sole proprietorship and a company
A sole trader, as the name suggests, is a self-employed person. If people are starting their own business, then self-employment is arguably the best option. Furthermore, rather than what industry a self-employed person is suited to, it is more important to say what size of shop a TA is more suited to. Depending on the size of the shop, self-employment can be a good option if you are just starting out or have only one shop.
The advantages and disadvantages of being self-employed are as follows:
There are no complicated formalities involved in being self-employed. You only need to do two things:
1. register with the tax office
- register with the social security office. Once you have successfully completed these two steps, you will be considered self-employed.
Spanish law requires tax registration regardless of what business activity is carried out and whether or not you have a shop. Registration is required as long as the business is carried out for profit and has a continuous economic purpose, regardless of the sector. Even if a person runs a business from home or on the internet, then he or she must register.
-The registration process is free of charge. You do not have to pay when you register with the tax office.
-It is also easy to stop being self-employed. If you want to stop your business, you just have to go and cancel your registration.
Self-employment is only available for small businesses.
A self-employed business is a business with unlimited liability. This means that if the business has debts (including government fines), the owner’s personal property will be implicated.
In contrast, a limited company applies to several partners starting a business together. Although there are many forms of company in our lives, the creation of a limited company (S.L) (known as a limited liability company (S.R.L)) is the easiest, quickest and most practical form of company to manage on a large scale and the advantages of a limited liability company are clear:
The assets of the company are divided from personal assets. This means that if something goes wrong with the company, such as a large compensation or fine, the personal assets are not implicated. This allows for better risk control.
This can be applied to a number of shareholders in a joint venture, plus a large scale investment.
The capital threshold for setting up a company is also relatively low: currently SLs can be set up with as little as €3.000 in registered capital.
Compared to self-employment, a limited company helps to improve the business image and expand business prospects.
Nevertheless, the steps involved in setting up a company are a little more complicated.
Do I have to pay more corporation tax than a self-employed person?
Firstly, you should be aware that self-employed people are subject to personal income tax as they are individuals. The rate of personal income tax in Spain is based on income, for example. In general, the rate is around 20% for low income. For high income earners the tax rate can be as high as 50%. Therefore, for small businesses, self-employment is a good option. Conversely, with high incomes you have to pay a lot of tax.
A limited company, by contrast, is subject to corporation tax (rather than personal income tax). According to the Corporation Tax Act, the current rate of corporation tax is a flat 25%, which means that the default rate is 25% regardless of the company’s turnover.
To summarise, for low income operations, personal income tax will be less taxing. However, if income increases, then corporation tax is more cost effective.
Note: For new companies, the state promotes entrepreneurship by only paying 15% on profits for the first two years.
