Self-employed or Limited Company in Spain, who pays less tax?
In our previous article we talked about some of the advantages of setting up an S.L. versus becoming self-employed. But in terms of taxation, do you pay more tax as a self-employed person or as a limited company?
Self-employed or Limited Company: Who pays more tax?
When starting a business, one of the first decisions to be made is the legal form of the new company. Normally, the choice is between registering as a self-employed person or setting up a limited company for two main reasons:
Initial capital to be made available
Taxes to which they are subject
Let’s take a closer look at each of them, to determine who pays more and who pays less between a self-employed person and a limited liability company.
Initial capital to start up a business: Who pays more, Self-employed or Limited Company?
The costs that the entrepreneur has to pay to register as a self-employed person or to set up a limited company differ depending on the legal form he/she chooses:
As an entrepreneur, registering as a self-employed person does not involve any capital cost. In other words, it is free of charge. However, although the registration as an employee is free, from the first month you will have to pay the first self-employed fee. If you want to know what are the costs of the self-employed fee in Spain and its reductions, you can click on the following link.
As a Limited Company, you will have to pay several initial expenses derived from the registration of the company in the Commercial Register, the reservation of the name, or the registration of the statutes, among others.
In addition, the biggest cost to be faced at the time of incorporating a limited company is the public deed of incorporation before a notary. This involves the contribution of the initial share capital which, in the case of limited companies, must be a minimum of 3,000 euros.
Once the Limited Company has met the initial incorporation costs, all that remains is to obtain the definitive NIF and register with the IAE (Economic Activities Tax), both of which are free of charge.
Taxes of a self-employed and an SL: Who pays less?
In addition to the difference in initial costs between a self-employed person and an SL at the time of starting up, there are also differences in taxation between the two legal forms, making them subject to different taxes:
A self-employed person is subject to costs that vary according to their income; personal income tax, for example, must be settled quarterly, and the withholding tax may be 7% for the first 3 years for professional self-employed persons, 15% in the following years, and 20% for non-professional self-employed persons. In addition, a self-employed person must also file a tax return, where the rates can vary between 19% and 45%.
A Limited Company is subject to tax costs such as Corporate Income Tax (IS), which is a general rate of 25%. In addition, as the owners of an SL act as legal persons, the income of the company does not affect their personal income tax declaration. It is worth noting that for the first two tax years of the limited company that has a positive result, the corporate tax rate for the limited company is 15%, which is significantly relieving for start-ups.
Thus, the main difference between being taxed by IRPF (self-employed) or by IS (Limited Companies) is very significant; the self-employed is subject to a progressive tax and, consequently, the more he/she invoices, the more he/she will have to pay. The Limited Company, on the other hand, is taxed at a fixed rate independent of its income.
Despite all these tax differences between the self-employed and the SL, both forms share taxes such as Business Tax and the obligation to pay VAT on a quarterly basis.
For all these reasons, when choosing the legal form to be adopted by the company, the time of the activity and the turnover expectations must be taken into consideration.
If you want to know more about how could you set up a limited company in Spain as a foreigner, please take in consideration the following post:
How can you set up a limited company in Spain as a foreigner?
Thanks for reading this article. If you still having questions regarding company formation in Spain, you can contact me or get an appointment here: +49 1520 8381499 or Email to Erica@taxandlawspain.com