Spain

Spain Sociedad de Responsibilidad Limitada (SL)

Synopsis

Spain can trace its history back to 1469 when the kingdoms of Aragon and Castile united through the marriage of Fernando de Aragon and Isabel de Castillo. By 1492 these United Kingdom's managed to usurp the Moors from the kingdom of Granada securing virtually all of the Iberian Peninsula. In the same year, the Americas were discovered by Christopher Columbus resulting in the establishment of one of the World's most important empires stretching at one point from California in the north to Chile in the south, not to mention various European and African interests. The defining event in modern Spanish history was the 1936 Civil War. It resulted in the death of some one million people and the leadership of General Francisco Franco, the fascist self-proclaimed President of the Spanish Republic 1936 to 1975). Notwithstanding Franco's close relationships with both Hitler and Mussolini, Spain was strictly neutral during the Second World War (1939 to 1945) although his inward-looking and extremely dictatorial regime undoubtedly held Spain back both economically and socially. In fact, up to and until the 1960's Spain was officially classified as a developing country by the United Nations. After Franco's death in 1975 the Spanish monarchy was reinstated with the anointment of Juan Carlos as King of Spain. Despite the fact the young aristocrat was personally groomed by Franco for this position, he soon showed himself to be a unifying force in what was still a potentially very unstable country. However, the greatest force for development was Spain's entry to the European Union in 1986, which resulted in unprecedented economic growth and investment with Spain once more being counted amongst the world's greatest economic powers. Nevertheless, the 2008 economic crisis hit Spain very badly with a property price collapse only equalled by the Republic of Ireland and one that even now in 2014 is still all too prevalent. Undoubtedly Spain is a very different country to pre-EU accession Spain but the 2008 World Financial Crisis, has clearly shown the country's regulatory and bureaucratic fault lines, which desperately need to be addressed if Spain is to recovery over the next decade. On a more positive front, the collapse of the Spanish property market once again makes it an excellent long term investment market and the SCF Group can assist clients in setting up their Spanish sociedad anonima (SA) and the sociedad de responsibilidad limitada (SL). The former is equivalent to a UK or Irish public limited company or PLC whilst the latter is equivalent to a private limited company limited by shares or limited. In fact, the SCF Group can not only set-up Spanish sociedad de responsibilidad limitadas (SL) or sociedad anonimas (SA) companies but can also assist with setting up a business in Spain, buying a Spanish residential or commercial property and also advising on what measures an individual should take before becoming a Spanish fiscal resident.

Star Ratings

Corporate registration efficiency

3

Cost

4

Confidentiality

3

Local Banking facilities

4

Legal system

4

Political stability

5

Reputation

5

spain

Location

Spain is located in the south western part of Europe bordered by France and Andorra to the north, Portugal to the west and Gibraltar to the south. It is 505,370 sq km or approximately the size of France with a population of 47,370,542 (July 2013 est).

Tax Planning Credentials

With the exception of the Canary Islands, which are treated as a Special Economic Zone (Zona Especial Canaria), Spain would not generally be considered as a tax planning jurisdiction due to high local individual and corporate tax rates. In addition, over the years the Spanish equivalent of HMRC (The Hacienda) has become much more sophisticated and more akin to the tax collection agencies in the more developed north-west European countries. However, the real reason most British, German, Dutch or Irish people move to Spain (be it to retire or set up a Spanish business) is because of the very attractive weather and relatively low cost of living.

Spanish Companies & Partnerships

There are two major limited liability entities in Spain; the sociedad anonima (SA) and the sociedad de responsibilidad limitada (SL). The former is equivalent to a UK or Irish public limited company or PLC whilst the latter is equivalent to a private limited company limited by shares or Ltd. Unlike the British Isles far fewer small businesses use a limited liability entity primarily for reasons of cost - the average cost to set up a SL is between €1,500.00 and €2,500.00, with the minimum capitalisation level being €3,000.00 plus a 1% stamp duty - but it is still recommended for all but the smallest enterprises. Apart from the two Spanish SA and SL companies, there is also the possibility of setting up a branch of a UK company, which has the considerable benefit of being far cheaper than setting up a sociedad de responsibilidad limitada whilst being governed by UK company law, rules, procedures and accountancy practices - The more familiarity that exists when moving to Spain the better. The general corporate tax rate is 35% (see Law 43/1995) but small to medium sized enterprises are taxed at the lower 30% rate, capital gains are taxed at only 15%. In addition, it should be noted that the Canary Islands are treated as a Special Economic Zone (Zona Especial Canaria) and offers distinct Holding Company benefits (There is no Stamp Duty) together with a TVA rate of only 5%. Further, companies setting up in the Canaries and that carry out their activities within the Canaries are subject to a progressive corporate tax rate starting at 1% and then rising to 5% over a 5 year period. Canary Island companies cannot avail of these lower rates if really trading outside of the Canaries or simply repatriating funds to the Islands. Apart from Stamp Duty the cost of registering companies in the Canary Islands is analogous to the Spanish Mainland.

Partnerships

Partnerships in Spain may be either general (compania colectiva) or limited (compania en comandita). It should be noted that in both cases below the partnerships are fiscally transparent save for non-resident partners who will be taxed according to the appropriate double taxation treaty provisions.

Compania Colectiva (CC): Most British companies and annual submissions are now formed electronically at Companies House in Cardiff or Edinburgh. SCF Legal & Corporate Management Services Limited is an authorized electronic company formation agent for Great Britain and a member of the Fe Phrainn Scheme in the Republic of Ireland

Compania en Comandita (CEC): This is the Spanish equivalent to the American limited partnership with both general and limited liability partners. The words "compania en comandita" must always follow the names of the partners concerned. There must always be at least one general partner who contributes to the capital and engages in the management of the partnership and one limited partner who simply contributes to the capital. General partners are jointly and severally liable for partnership debts and liabilities. Limited partners are only liable - as a shareholder would be in a limited liability company - in respect to the amount they have contributed. Where one is a limited partner and one has confidence in the general partner

The Spanish Tax System

There is a common misconception in the UK and Ireland that foreign residents need pay little or no tax in Spain and that the authorities are quite relaxed about collecting taxes. In reality, whilst prudent decisions can save investors and/or fiscal resident's significant sums, nothing could be further from the truth. In reality, the Spanish now rigidly enforce their taxes; require permanent residents and foreign companies to acquire tax identification numbers, tax residents on their worldwide income and assets, have punitive inheritance and gift taxes; property acquisition taxes as high as 9.5% plus taxes that UK and Irish nationals would not be used to such as the annual wealth tax. Nevertheless, despite the quagmire of potential tax exposure a well advised person can protect his/her hard earned money/assets relatively efficiently but only if executed through tried, trusted and needless to say scrupulously legal methods.

Fiscal Residence

If an individual is in Spain for over 183 Days in any Fiscal Year (This correlates with the Calendar Year in Spain) he or she will be automatically deemed resident in Spain for tax purposes. There can also be an automatic inference of tax residence on the basis that family members live in Spain (i.e. that children are in school), that one has the intention to permanently reside in Spain or, if a business has been established in Spain that it is the centre of economic interest. Of course, in the case of the tax residence automatically being ascribed despite not having been in Spain for a period greater than 183 days it is possible to rebut the inference/presumption especially if protection is being sought under the UK or Irish Tax Treaties. For example, within the Tax Treaty signed between the UK and Spain on the 21st of November 1975 there are a number of Tie Breaker clauses used to determine fiscal residence. Thus, where local rules infer tax liability in both countries then the fiscal residence will be deemed to exist in the country where there is a permanent home, if there is a permanent home available in both countries then fiscal residence will be deemed to exist in the country which can be shown to be the centre of vital economic interests. If even the last test is unclear then fiscal residence will be ascribed to the country of which one is a national.

Fiscal Identification Numbers

A Foreigners Identification Number or NIE (Numero de Identificacion de Extranjerosl or, or in some areas a Fiscal Identification Number or NIF (Numero de Identificacion Fiscal), is required by all individuals fiscally resident in Spain. In addition, such identification numbers are also required where non-fiscally resident foreigners directly own property in Spain. Where companies own the Spanish properties of non-fiscally resident individuals it is not necessary to obtain a personal identification number. However, the companies themselves will have their own identification number/code known as a CIF (Codigo de Identificacion Fiscal) or Financial Identification Code.

Income Tax

Individuals deemed to be fiscally resident in Spain are taxed on their worldwide income, individuals not fiscally resident in Spain will - subject to applicable double taxation treaties - be only subject to income tax on their Spanish income such as income derived from property rental. * It should be noted that Spanish income taxes are not incremental but employ what is known as a tiered "Claw Back" system.

Inheritance and Gift Taxes (Impuestos sobre Sucesiones y Donaciones)

These apply, unlike in many countries, even in the case of a deceased husband passing on his wealth to his wife. The recipient pays the tax. Further, the standard rates of tax are subject to a Multiplier varying from 1.00 to 2.40 depending on the Class of the Recipient. For example the lowest rates apply to spouses and children followed by relatives, followed by others. In Spain there is no equivalent to a common law partner so such a partner would be subject to the very maximum Multiplier. There is a standard individual deduction, at the time of writing, of approximately €18,000.00, which means that virtually every Spanish resident person is ostensibly subject to these taxes. The standard rates after taking account of the individual deduction vary from 7.65% to 34% however after the application of the Multiplier the rates can go as high as 81.6%. Thus, if a person gifted their house worth €1,000,000.00 to a spouse the tax payable would be €340,000.00; if on the other hand the gift were to a non-related third party the tax would be €810,600.00! Main Residence Tax Base Reductions -Where a spouse, child or relative over 65 who previously lived with the deceased for at least 2 years immediately prior to his/her death and continue to live in the said property for at least 10 years from the date of death the taxable base on the Main Residence will be reduced by 95% up to a maximum reduction of up to €122,606.47 for each inheritor. It should be noted that there is a very similar deduction for the transfer of a family business.

Spanish Anti-avoidance Provisions & Starting Up A Business

The key point to note is that Spain has developed a range of tax anti-avoidance provisions every bit as sophisticated as those employed in the United Kingdom and Republic of Ireland (see Article 25 of the Spanish General Tax Code). This means that whilst it is perfectly acceptable to use double taxation treaty provisions and EU directives and regulations to mitigate or legitimately transfer profits in or outside of Spain, it is certainly not acceptable or legal to insert in artificial fax haven companies (see Law 31/19901 or to siphon off surplus funds. Nevertheless, as will be shown the dynamics of many business activities carried out in Spain do present significant tax mitigation possibilities.

Transactions should be at "Arms Length"

The thrust behind this principle is that intra-company transactions should only be deemed to be valid where the terms of such transactions are considered to be at market rates. Thus, creating artificially high interest rate levels between related companies la related company is deemed to be one where there is a direct or indirect common beneficial ownership of over 25% between the pertinent firms) would not be deemed acceptable.

Controlled Foreign Companies (CFC's)

Spanish CFC legislation is covered by Articles 2 and 10 of Law 42/1994. Basically it means that where a Spanish company owns or controls 50%, or more, of a foreign company and such foreign company is located in a jurisdiction where -subject to specific tax treaty provisions - the overall effective tax rate is less than 75% of the Spanish tax rate (i.e. in the case of corporate tax this would mean 75% of the 35% Spanish rate or 26.25%) then any passive income or capital gains must be imputed even if not distributed within the taxable base. Obviously, the point here is that reference is made only to passive income and such legislation does not apply to bona fide transactions

Double Taxation Treaty Network

Spain has one of the World's largest double taxation treaty networks, which are especially strong in the Spanish speaking world and of course also benefits from all the various EU directives and regulations. For more details on Spanish limited companies, buying a property in Spain or investing in Spain please contact an SCF Consultant