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Company Formation in Spain

Overview :

Spain’s mixed capitalist economy is the 13th largest in the world, and its per capita income roughly matches that of Germany and France. However, after almost 15 years of above average GDP growth, the Spanish economy began to slow in late 2007 and entered into a recession in the second quarter of 2008. GDP contracted by 3.7% in 2009, ending a 16-year growth trend, and by another 0.1% in 2010, before turning positive in 2011, making Spain the last major economy to emerge from the global recession.

The reversal in Spain’s economic growth reflected a significant decline in construction amid an oversupply of housing and falling consumer spending, while exports actually have begun to grow. Government efforts to boost the economy through stimulus spending, extended unemployment benefits, and loan guarantees did not prevent a sharp rise in the unemployment rate, which rose from a low of about 8% in 2007 to over 20% in 2011. The government budget deficit worsened from 3.8% of GDP in 2008 to 9.2% of GDP in 2010, more than three times the euro-zone limit. Madrid cut the deficit to 8.5% of GDP in 2011, a larger deficit than the 6% target negotiated between Spain and the EU. Spain’s large budget deficit and poor economic growth prospects have made it vulnerable to financial contagion from other highly-indebted euro zone members despite the government’s efforts to cut spending, privatize industries, and boost competitiveness through labour market reforms. Spanish banks’ high exposure to the collapsed domestic construction and real estate market also poses a continued risk for the sector.

The government oversaw a restructuring of the savings bank sector in 2010, and provided some $15 billion in capital to various institutions. Investors remain concerned that Madrid may need to bail out more troubled banks. The Bank of Spain, however, is seeking to boost confidence in the financial sector by pressuring banks to come clean about their losses and consolidate into stronger groups.

Advantages of incorporating business in Spain
  • Since emerging from international isolation during the Franco era, Spain has steadily become more active in international affairs.
  • Spain is the eighth largest industrialised economy in the OECD (Organisation for Economic Co-operation and Development). For the past five years, the Spanish economy has also experienced one of the strongest rates of GDP growth in the European Union which makes it the most dynamic within the EU. Also, in the space of 40 years the Spanish tourism industry has grown to be the second largest in the world. Spain’s economy is the ninth largest worldwide and the fifth largest in Europe according to the World Bank.
  • Spain benefits from the transit of goods within the EU without unnecessary formalities, including exchange rate fluctuations and transaction costs. The European Union is very generous towards Spain with its structural and cohesion funds.
  • Also the Spanish Government offers various incentives and flexible policies for developing businesses. More recently, the Spanish Government has pursued policies aimed at creating a welcoming environment for foreign investment.
Tax Regime

The corporate tax rate is 30%. All expenses for the property are deductible, including utilities, renovation work, management fees, and property taxes. Tax returns are submitted between April and June of the following year and reimburses are paid between May and July. The standard VAT rate is 21% in Spain.

Spanish resident tax returns declaring income received in the 2012 calendar year will be submitted during May and June 2013. The returns are due by 30th June 2013.

Most foreigners will be considered Spanish tax resident if they were in the country for 183 or more days during 2012. They must complete a tax declaration including all their worldwide income unless their income is lower than the thresholds described below. Anyone becoming tax resident for the first time (because they moved to Spain during 2012) must file a tax declaration regardless of income levels.

Types of entities

Sole Trader :

If you want to begin small and don’t have much capital, you can set up as a sole trader (impresario individual). The main advantage of this option is that it’s the simplest legal business entity. Your only fiscal obligations are to register for tax, VAT and social security as a self-employed worker and also for tax on your business activities. A further advantage of being a sole trader is that you aren’t obliged to make a specified investment in your company; it can be whatever amount you can afford.

Limited Liability Company :

A limited liability company is known as a Sociedad de Responsabilidad Limitada (SL), which is similar to a British limited company or an American limited liability company (LLC). It’s the most common form of small and medium-size company. The reasons for its popularity are its simplicity, the relatively small investment it requires and, as the name suggests, the fact that your liability is limited if anything goes wrong or someone sues you. The disadvantage, compared with operating as a sole trader, is that you’re liable for corporation tax and VAT as well as your personal tax and social security contributions.

Sociedad Limitada Nueva Empresa :

In April 2003, a modified version of the SL was introduced, called a Sociedad Limitada Nueva Empresa (SLNE). The idea behind it was to encourage the incorporation of small and medium-size businesses, and the fact that its fiscal requirements are simpler than those of an SL should make it an increasingly popular option. An SLNE also differs from an SL in terms of the number of shareholders and permissible company names. The maximum number of shareholders allowed with this type of company is five, a move intended to keep SLNEs small. The company name must comprise one of the founder’s names, a registration number and the letters SLNE. The minimum capital required is virtually the same as for an SL (€3,012 – all of which must be in cash) but the maximum is €120,202.

Public Limited Company :

A Sociedad Anónima (SA) is the Spanish equivalent of a British public limited company (plc) or an American corporation and is the next most widely used type of business entity in Spain. An SA requires a much larger investment than an SL so it’s usually the choice of big businesses working on major projects that wish to make an investment in Spain. The minimum investment required to form an SA is € 60,101 and at least 25 per cent of that must be paid into the company bank account before incorporation.

Partnership :

If you want to make your business arrangement official (and legally avoid paying corporation tax) but don’t want to start a business as such, it’s possible to establish a partnership (sociedad civil). There must be a minimum of two partners and, although there’s no minimum investment, they must agree to invest the same amount of money. They must also share the work, the goodwill and the profits equally. There’s unlimited liability for partners, which they must share equally. You must still pay 1 per cent of the capital deposited in transfer tax and register for tax on economic activity, register for income tax as self-employed workers and register with the social security authorities.

Small & Medium-size Businesses:

Small and medium-size businesses (pequeñas y medianas empresas/PYME) dominate Spain’s economy (according to the Ministry of Industry, Tourism and Commerce, 99 per cent of Spanish businesses are PYMEs), and the government encourages both their formation and their growth. As a result, many PYMEs qualify for grants, incentives and reduced corporate tax rates.

Time Period:

It usually takes 28-30 days to form a company in Spain.