Ways to invest in Spain
A) Company with separate legal personality
There are two main types of companies: the sociedad limitada (S.L.), or limited liability company, and the sociedad anónima (S.A.), or public limited company.
S.L.s are the most common type of company in Spain (96% of all companies incorporated in the country in 2016). Main characteristics of S.L.s include:
- Minimum capital: €3,000, fully paid in and divided into shares (not considered securities).
- Managing body structured as follows: sole director, joint directors, directors acting severally or board of directors (minimum of 3 and maximum of 12 directors).
- Possible restrictions on the transfer of shares, so usually there are only a few shareholders. The deed of incorporation must be placed on file as a public instrument.
- Average time for incorporation: 3 weeks.
The company structure most often used for large investments that might eventually be foated on the stock market is the S.A. Characteristics of S.A.s include:
- Minimum capital: €60,000, 25% of which is paid in, divided into shares (securities represented by certifcates or book entries)
- Managing body: sole director, joint directors, or board of directors (minimum of three, no maximum)
- Independent expert report required for non-monetary contributions
- No restrictions on share transfers
- Average time for incorporation: 5-6 weeks
The liability of shareholders in both types of companies is limited to their capital contributions.
Entity without separate legal personality. No limit on the liability of the parent company.
Procedural formalities for incorporating a company
- Secure a clear name search certificate.
- Request a taxpayer identification number (Spanish NIF) for the company and its foreign shareholders and directors, whether they are individuals or legal entities.
- Notarized powers of attorney.
- Deed of incorporation executed as a public document before a notary and registration at the Commercial Registry.
General matters regarding investment
- Foreign investment controls: The Spanish government requires prior notice of certain capital movements in order to prevent tax fraud, as well as authorizations in certain industries such as telecommunications and air transport. Payments between residents and nonresidents must be made through entities registered with the Ministry of Economy.
- Accounting standards: Spain has adopted IAS/ IFRS and requires the preparation of annual fnancial statements.
A) Direct taxation
Corporate income tax (Spanish IS)
Nature: Direct tax levied on worldwide income of companies resident in Spain.
Tax residence: Companies are resident in Spain when they have been incorporated in accordance with Spanish legislation, when their registered offices are located in Spanish territory or when their place of effective management is in Spain.
Tax base: Profit or loss for accounting purposes, adjusted upwards or downwards in accordance with tax principles.
Tax rate: The standard rate is 25% (special rates of up to 30% exist for financial institutions).
Dividends and capital gains: Taxed at the standard rate except where the exemption to avoid double taxation applies. In order to apply this exemption, the shareholding in the resident entity must be at least 5% of total capital or have an acquisition value of over €20 million, and must be held for at least one year without interruption. In the case of foreign companies, the investee must have paid corporate income tax or a similar tax at a rate of at least 10%, or be domiciled in a jurisdiction that has entered into a tax treaty with Spain.
Offset of tax losses against future profits: While there is no time limit, the offset is restricted to a percentage of taxable income prior to offset (70%, 50% or 25%), based on the company’s revenue. The maximum amount for offset is €1 million per year.
Rules on related-party transactions: In line with OECD transfer pricing guidelines, whereby related-party transactions are valued on an arm’s length basis and are subject to certain documentation requirements.
Main special regimes:
- Tax consolidation regime for groups of companies, provided the parent company holds at least 75% of subsidiaries’ capital (70% in the case of listed companies).
- Tax neutrality regime applicable to restructuring transactions such as mergers and spin-offs.
Main anti-avoidance rules:
- General anti-avoidance rule (GAAR).
- Limit on the deductibility of net finance costs: limit of 30% of operating profit (deductible up to €1 million). Additional limit on the deductibility of finance costs derived from borrowings used to acquire holdings, in the case of acquisitions arising from mergers or consolidation.
Formal obligations: Prepayments in April, October and December of the current tax year and fling of a corporate income tax return in July of the following year (if the fiscal period is the calendar year; otherwise, within 25 days of the 7th month following the period close).
Personal income tax (Spanish IRPF)
Nature: Tax levied on the worldwide income of individuals resident in Spain for tax purposes.
Tax residence: An individual is a tax resident in Spain if he or she has been in the country for over 183 days of the year or if his or her center of economic interests is in Spain. An individual is presumed to be a tax resident of Spain when his or her spouse and/or dependent children live in the country.
Tax rate: General income (such as employment income or business income) is subject to a progressive tax up to a maximum of around 45%. Savings income (such as interest income, dividends and capital gains) is taxed at a maximum of approximately 23%. These rates may vary by autonomous community.
Incentives for the international mobility of workers: Inbound expatriates can apply a special regime (paying taxes as nonresidents when they meet certain conditions), and outbound expatriates can take advantage of an exemption on earnings obtained from work performed abroad.
Nonresident income tax (Spanish IRNR)
Nature: Tax levied on income earned by individuals or legal entities that are not resident in Spain.
• International tax transparency rules (controlled foreign corporation, CFC).
Permanent establishment (PE): Income attributed to an EP is taxed in accordance with corporate income tax rules.
Income obtained without a PE:
- Main tax rates:
- Standard: 24% (19% for EU residents).
- Dividends, capital gains and interest income: 19%.
- Royalties: 24%.
- Main exclusions:
- Capital gains (does not include buildings, real-estate companies or substantial holdings in companies) and interest income obtained by EU residents or residents of countries with which Spain has a tax treaty that contains an information exchange provision.
- Dividends, interest income and royalties, in application of EU directives, when paid to associates resident in the EU and providing certain requirements are met.
Rates may be reduced or taxes may be eliminated upon application of tax treaties.
B) Indirect tax
Value added tax (VAT)
Nature: Indirect tax levied on supplies of goods and services, intra-Community acquisitions and imports made by traders or professionals in Spanish territory (except the Canary Islands, Ceuta and Melilla). VAT is primarily borne by consumers and, in general, is neutral for companies that act as collection agents, given that they charge output VAT to their customers and receive a refund for input VAT paid to their suppliers. VAT is not neutral in sectors that carry out VAT-exempt activities (such as the financial sector).
Tax rates: 21%, 10% and 4%.
Transfer tax under “transfers for consideration” heading (Spanish TPO)
Nature: Indirect tax levied on transfers of assets and rights for consideration, as well as on the creation of rights in rem of use, enjoyment, surety, personal rights (loans) and administrative concessions by individuals or entities that are not traders or professionals acting in the course of their business, as well as on certain real-estate transactions not subject to or exempt from VAT.
Tax rates: 1%-10% depending on the taxable event and the autonomous community.
Stamp tax: Levied on, inter alia, the execution of public documents that may be registered at a public registry. Tax rate: 0.5%-2%.
Transfer tax under “corporate transactions” heading: Tax levied on certain corporate transactions, such as capital reductions and liquidation. Incorporation of companies and capital increases are excluded from this tax. Tax rate: 1%.
Tax on business activities (Spanish IAE): Local tax levied on companies with revenue of at least €1 million, for business activity carried out in a specific municipality through the application of tariffs.
Tax on construction, installation projects and works (Spanish ICIO): Local tax levied on any construction, installation project or works requiring a municipal license. Maximum rate of 4% of the cost of the project (depending on the municipality).
Tax on increase in urban land value: Levied on the increase in land disclosed in the course of an inter vivos transfer or mortis causa transmission.
Inheritance and gift tax: Regional (autonomous community) tax levied on acquisitions for no consideration carried out by individuals (may differ significantly by region).
Wealth tax: Regional (autonomous community) tax levied on total assets of individuals (may differ significantly by region).
Social security contributions
Maximum base: €3,715.20 for 2018. Contribution rates under the general program:
- Employee contribution: total of 6.35% for all contingencies (6.40% for fixed-term contracts).
- Employer contribution: total of 29.90% for all contingencies except work-related accidents and illnesses (31.10% for fixed-term contracts).
Labor and employment matters
Regulation: The labor relationship is governed by the employment contract, the collective labor agreement, the Workers’ Statute and other European and international regulations.
Types of contracts:
- Indefinite-term (general rule)
Salary: May be established in the employment contract or in the collective labor agreement for the occupational group in question. May not be less than the minimum wage (€735.90 gross per month in 2018).
Working hours: As established in the employment contract or in the collective labor agreement. May not exceed 40 hours per week, calculated on an annualized average basis.
Vacation: 30 calendar days (may be increased pursuant to collective labor agreement).
Business succession: Employees’ labor relationships are not extinguished in the event of an inter vivos transfer or mortis causa transmission of a company.
Foreign workers: A work permit is required (depending on the contract and the type of work), except for EU citizens, who are exempt from this requirement.