Business taxation

Company taxation in Spain

Business taxation

If you have your own company, are a sole trader or are self-employed, you will have to pay not only your own personal income tax but also possibly a tax on your economic activities, and all Spanish companies – but not the self-employed and sole traders – must pay corporation tax.

Tax on Economic Activities

Spain levies a ‘tax on economic activities’ ( Impuesto sobre Actividades Económicas/IAE), which must be paid by businesses, self-employed workers and professionals with an annual turnover of more than €1 million. It used to be a local tax but now comes under the jurisdiction of the national tax authorities. The IAE is levied annually, irrespective of the type or size of your business. Because of the turnover limit, introduced in 2003 to encourage the set-up of small businesses, most businesses don’t have to pay this tax; however, whatever your turnover, you must register for IAE, as your business or profession must have a tax category and a code number ( epigrafe), which are assigned when you do so. IAE is likely to be replaced by another tax in the not too distant future, not least because local councils have lost a considerable amount of revenue since the introduction of the turnover limit.

Corporation Tax

Corporation (or company) tax applies to companies only (not sole traders or the self-employed, unless they’ve formed a company). It’s known as Impuesto sobre Sociedades and is levied on any company which is resident in Spain for tax purposes, which means that it was incorporated under Spanish law, or that its registered office is in Spain or that its management headquarters are in Spain. The government is keen to encourage foreign companies to operate in Spain and so company taxation laws have recently undergone a series of changes designed to make their set-up simpler. There are also considerable tax incentives for small and medium-size companies.

If your company is incorporated in Spain, it will be taxed on all its worldwide profits, earned and unearned, including income from investments and asset transfers, at a rate of 35 per cent. However, if you qualify as a small or medium-size company, you will pay a reduced rate of 30 per cent and if you happen to set up a business in the Canary Islands, you will benefit from their special company taxation system and may only have to pay between 1 and 5 per cent corporation tax, depending on whether you comply with the required conditions.

It’s advisable to get an experienced firm of accountants ( asesoria fiscal) to complete and submit your corporate tax returns. Corporation tax must be paid within 25 days of the company’s Annual General Meeting, which must be held within six months of the end of the fiscal year (31st December).

This article is an extract from Making a Living in Spain. Click here to get a copy now.

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