Zurbano staff have the necessary expertise to advise you about the possibilities to run your business in Spain. We are in a position to offer all the necessary services that your company will need in labour, legal, tax and accounting.
Please find out some notes about the most common legal ways to run your business in Spain and the labour, legal, tax and human resources implications.
There are several possibilities to run your business in Spain, this could be through the incorporation of a Spanish company or branch alone or in association with another entrepreneurs.
There are other possibilities as the joint ventures with an existing company or participating in a temporary business association "Union temporal de Empresas"
Finally not always is necessary to set up a formal structure to run your business in Spain, penetration in the Spanish market could also takes place through the conclusion of distribution agreements, agency agreements or franchising.
In summary, foreign investor may choose various forms of legal structures,
although the most common used in practice are the:
The main characteristics of the S.A. are as follows:
Application for registration is made by filing a deed that has been previously granted before a Notary Public and contains the Articles of Incorporation and certain other documents. The Commercial Register will record the name, the registered office, the share capital, the directors, all the contents of the Articles of Incorporation, the name of the auditors, etc. Any member of the public has free access to the Register.
The financial statements have to be public and must be filed with the Commercial
Register.
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The main differences between the S. L. and the S.A. are as follows:
This organisation is not a legal independent entity on its own but an extension of the head office abroad and, in nearly all cases, will be considered as a Spanish permanent establishment. However, it must have a tax representative and a permanent address in Spain.
The formation of a branch usually takes the same time as the formation of a company. In the case of a branch, there is no minimum share capital requirement. Like other companies, the foreign company must execute a deed before a Spanish Notary Public formalising the establishment of the branch. Afterwards, it must apply for registration by filing this deed, a certified copy of its Articles of Incorporation and certain other documents with the Commercial Register.
The main differences that should be taken into consideration are:
To sum up: we understand that the really relevant advantage of having a branch might be the possibility stated under the above point "Financial statements of the head office"in case significant losses are expected for the branch during the first years.
Except for this point, we consider that in general terms a subsidiary is more advantageous.
The most common way is usually through the incorporation of a new company or through the purchase of shares in an existing company. In this second case the following points must be taken into consideration:
Positive clearance for the projected acquisition would have to be obtained from the General Directorate of Foreign Transactions is needed in certain cases. The transfer of the shares of a Spanish company must generally be attested to by a Spanish public authenticating officer (stockbroker, notary public or Spanish consul abroad), or by a brokerage agency in some cases. In case of transfers of shares of companies whose assets consist mainly of Spanish real estate transfer tax may arise to a rate of 6% to 7%.
UTE's are temporary business cooperation vehicles set up for a specified or unspecified period of time, for the purpose of carrying out a specific project or service. UTE's allow several companies to operate together in one common project.
UTE's are not corporations and have no legal personality. They are formed by notarial deed and are registered in the Spanish Ministry of Economy and Finance's Special Register of UTE's. Furthermore, they may be also registered al the Commercial Registry. However, UTE's must comply with bookkeeping and accounting requirements similar to those of corporations.
These types of entities have a special tax regime.
As for the tax treatment of distribution agreements, non-resident manufacturers not established in Spain will record business income in Spain on the sale of their goods to distributors, and this income is usually taxable in Spain.
Spanish Law 12/1992, on Agency Agreements, implemented Directive 86/653/EEC. Through an agency agreement, the agent, negotiates commercial acts or operations on behalf of another, as an independent intermediary, on a continuous or regular and remunerated basis, without assuming the risk and hazard of said operations, unless otherwise agreed.
The essential components of the agreement are as follows:
Regarding its tax treatment, the main point is determining whether a commercial agent can be considered as a permanent establishment in Spain of the principal, which will mainly depend on whether or not there is a relationship of dependence between them.
This is the agreement under which the authorized agent undertakes to perform or participate in a commercial act or agreement for the account of the principal. Commission agents may act in two capacities: In their own name, i.e. they are not direct representatives and they acquire rights against the contracting third parties and vice versa. On behalf of their principal. This gives rise to the effects of direct representation and, accordingly, the principal acquires rights against third parties and vice versa.
The obligations of commission agents are as follows:
Differences
The main similarity between the two types of agreement is that, in both cases, an individual or legal entity undertakes to pay another compensation for arranging an opportunity for the former to conclude a legal transaction with a third party or for acting as the former's intermediary in concluding that transaction.
The main difference between the agency agreement and the commission agent is that a commission agent is a person who seeks to facilitate the conclusion of an agreement but who does not ultimately represent either party. The commission agent brings the parties together so that they can conclude an agreement but, in reality, is not party to that agreement, whereas an agent represents one of the parties.
It is an agreement where the franchiser grants a right to, and imposes an obligation on, its individual franchisees to do business using the franchiser's concept. In return for a direct or indirect financial consideration, this right entitles, and obliges, individual franchisees to use the brand name and/or trade or service mark for the goods or services, the know-how, the technical and business methods, the procedures and other intellectual property rights of the franchiser, backed by the ongoing provision of commercial and technical assistance under, and during the term of, the relevant written franchising agreement between the parties.
There are various types of franchising agreements as depending on the areas of activity, industry, distribution, services, . . . The general requirements to be met by franchising agreements in order to avoid violating antitrust law are:
Lastly, as regards the tax treatment of franchising agreements, the nature of the consideration paid by the franchisee to the franchiser should be analyzed since it could be considered as a royalty and as business income, or only as a royalty, depending on the different services rendered and rights granted (if royalties, they are taxed in Spain at 25% or at the reduced double taxation treaty rate, if any).
All forms of business organisations (both capital and other forms) must be officially established by a public deed before a Notary Public and then entered into the Commercial Register ("Registro Mercantil"). The deed must contain the Articles of Incorporation, the by-laws of the company and other minor information. Any modifications to the statutes must also be carried out by public deed and entered into the Commercial Register. The usual procedural steps to incorporate a company are the following:
The basic law in this field is the Workers' Statute (Royal Legislative Decree 1/1995), which defines the respective rights of employees and employers, general terms of labor contracts, procedures for dismissal and collective bargaining rules.
In addition, there are specific regulations for different production sectors and certain groups of employed persons such as commercial representatives and top management personnel.
Another important source of labor law is collective bargaining agreements, which may be negotiated at industry, regional or company level.
There are also detailed regulations affecting working hours, worker safety and health in specific industrial sectors.
The minimum working age is 16. Hiring an employee is normally formalised by a contract, although this is not a statutory requirement. Standard employment contracts in Spain are permanent, althoutgh temporary contracts for specific circumstances are also permitted by law. Due to the lack of flexibility in the Spanish labour legislation, it is important to ensure that the most suitable type of contract is drawn up at the outset.
Employers cannot discriminate in the selection or promotion of employees on the grounds of sex, marital status, age, nationality, religion or race.
Generally, the annual salary is paid in twelve or fourteen payments. When paid in fourteen instalments, two of these payments are made in June and Christmas in addition to the monthly wage for those months. A minimum wage per month exists; it is fixed each year by the government, irrespective of the sectors or type of work. Other collective wage agreements may stipulate different conditions and wages.
The average annual holiday is 30 calendar days or 21/22 labour days. The normal working week may not exceed 40 hours, while overtime may not exceed 80 hours in any one year. Unless agreed to the contrary, overtime worked must be compensated by time off work during the four months following the date of the overtime being worked.
Fringe benefits and other benefits in kind such as housing, company car, schooling and meals are taxed as part of the remuneration of the employee and may not exceed 30% of the salary.
Termination of employment may be initiated in three ways:
Indemnity payment for termination by the employer is determined by law at an amount equivalent to 45 days of salary per each year worked for the firm, with a maximum of 42 months salary. However, in case of collective layoff or redundancy for special economic, organisational, technical or productive reasons, the indemnity fixed by law is of 20 days of salary per year worked with a maximum of 12 months salary. Great care should be taken to ensure compliance with the relevant laws for the dismissal of an employee.
The foreign investor should be aware that the labour and Social Security laws in Spain are comparatively rigid. In common with other EU countries, Spain does not have the contractual flexibility in respect of labour contracts which exists in some non-EU countries.
A top executive is a person who has broad powers of attorney or administration relating to overall company objectives and exercises authority with autonomy and full responsibility, reporting only to the company's governing body.
The terms of employment for such executives are subject to fewer constraints than for ordinary employees.
As a general rule, the parties have a wide margin of flexibility in defining their relationship by contract.
Top executives may be dismissed without cause, in which case they are entitled to an indemnification of seven days' pay per year of service up to a maximum of six months' salary unless other terms are agreed to by contract.
Top executive contracts commonly stipulate indemnification provisions that are higher than the legal minimum.
If a business is transferred, both the seller and the buyer may be jointly and severally liable for labor claims which arose prior to the sale and for a period of three years thereafter. When a business is transferred, the employees are also transferred, and the new employer must maintain the seniority and other rights of the transferred employees.
If the change in ownership results in significant changes in business activities, philosophy or management, workers may be entitled to terminate his employment contract and receive an indemnification.
Besides representation through the Trade Unions, employees also have extensive statutory representation. Employee representatives ("delegados de personal") who are elected in companies with more than 6 employees and less than 50 represent employees in their company. This representation is optional for the employees.
In companies with more than 50 employees it is mandatory, if requested by the employees, to have an employee committee. The aim of this committee is to provide information on the company's management policy to employees. Otherwise an employee delegate must exist.
Employee representatives must be informed on significant economic and legal changes affecting the company. However, they are not entitled to sit on the Board of Directors and have no voice in management decisions.
In companies with more than 6 employees, one person (either employee or employer) must be in charge of the compliance with health and safety regulations on behalf of the employees.
Non-EU nationals intending to work in Spain must obtain a special work visa and a work and residence permit.
Work permits are granted taking into account the employment situation of Spanish nationals for the same kind of work.
Foreigners who intend to reside in Spain but who will not work in this country, either as employees or as self-employed persons, must obtain a residence visa before establishing their residence in Spain and a residence permit.
For nationals from the EU countries there are no restrictions on obtaining employment in Spain. A combined work and resident card must be applied for once the person exceeds 3 months working in Spain. If merely residing working in Spain and not working here, a residence card must be applied for after 183 days.
Salaries in kind are taxable for the employee, according to the price payd
by the employeer for such services.
Among others, the following salaries in kind, haved special rules to determinate the taxable retribution for the employee:
Example:
Employee with the gross salary of 50.000 € per year. He is married with two sons of 3 and 6 years old. His wife does not work.
He will have the following salaries in kind:
If it is a lease or renting car, the value to be considered as salary in kind is 20% of the total cost for the company. If total cost is 25.000€, salary in kind would be 5.000 € per year. It will then be necessary to consider which percentage is private use and which is business use. In our example we will consider that 50% is company use and 50% business use. Consequently salary in kind will be 25.000*20%*50%= 2.500€
Being the business use 50%, only 50% of VAT paid will be deductible for the company VAT purposes. Rest will be deductible but only for corporate tax purposes. (700+51)= 751 € per month= 9.012 € per year.
Housing: 9.000 € per year.
Taxation on housing has a maximum limit of 10 % of other taxable retribution or 10% of the cadastral value of the house. In our case we will use 10% of other retributions.
Ticket restaurant: 1.500 €
Ticket restaurant are tax and social security free, up to an amount of 7.81€ per day.
Nursesry of the youngest son: 3.000 €
This expenses are tax and social security free under some conditions
Schooling is considered as a salary in kind without special regulations
Is tax and social security free up to an amount of 500 per member of the family (500*4=2.000 so 1.800 is fully tax free)
Accident insurances are tax and social security free
Withholding tax rate: will depend on family circumstances, age and number of sons, etc.
Social security: standard rate for non risky activities arises to about 32%. Aditionally employee should pay about 6,35 %. Maximum Soc. Sec. Base amounts to 2.652€ per month or 31.824 € per year, whatever the salary is.
Withholding tax is calculated over gross cash salary and other salaries in kind in our case.
Withholding tax is calculated over gross cash salary and other salaries in kind in our case
Payroll calculation considering taxable salary
| Gross cash salary | 50.000 |
| Car | 2.500 |
| Housing | 5.650 |
| Schooling | 4.000 |
| Total taxable salary | 62.150 |
| Withholding/advance tax 27% | - 16.780 |
| Social security | - 2.021 |
| Net cash retribution | 31.199 |
Net value of the salary for the employee at market prices
| Net salary | 31.199 |
| Car | 9.624 |
| Housing | 9.000 |
| Ticket restaurant | 1.500 |
| Kindergarden | 3.000 |
| Schooling | 4.000 |
| Medical insurance | 1.800 |
| Accident insurance | 1.000 |
| Net Value | 61.123 |
Company cost:
| Gross cash salary | 50.000 |
| Car | 9.012 |
| Housing | 9.000 |
| Ticket restaurant | 1.500 |
| Kindergarden | 3.000 |
| Schooling | 4.000 |
| Medical insurance | 1.800 |
| Accident insurance | 1.000 |
| Company social security | 10.184 |
| Total employeer cost |
89.496 |
To summarise, total company cost would be 89.496 while total value received by the employee after taxes would be 61.123
This example just tries to bring a brief approach of calculations base on
standard premises. A final calculation will need a deep study of the circumstances
and legal requirements that applies to them.
All employees working for an employer who has an establishment in Spain must be affiliated to the Spanish Social Security System as must the employer. Registration with the local Social Security Office should take place prior to an employee being hired.
EU social security regulations are applicable to Spain.
When a worker moves from one Member State to another the following basic rules apply: Workers are subject only to the social security regulations of one Member State. As a general rule, the applicable social security regulations will be those of the country in which the worker performs his activity. If certain requirements are met, the time during which an EU worker contributes to the social security system of another Member State will be computed as a contribution period to his own country's social security system for the purpose of determining his future benefits from his national social security system. If a worker of an EU country is temporarily transferred by his company to another Member State to perform a job in the latter State on behalf of his company, this worker will remain subject to the social security regulations of the first Member State, provided that the foreseeable duration of the job does not exceed 12 months and he is not sent to replace another employee who has completed the period of time for which he was transferred. This 12-month period can be extended for an additional period of the same duration or, where appropriate, as provided in the bilateral treaties.
Several Social Security treaties between Spain and other countries are in force (principally, most European and South American countries plus Canada, Morocco and the United States).
The combined contribution of the employer and the employee is a function of total remuneration, including benefits, paid to the employee.
Employers must pay their Social Security contributions by the thirtieth day of the month following the month to which the contribution corresponds. Standard rate employer contributions are about 32% of the remuneration. There are maximum limits for contributions depending on the category of such employee.
Employee contributions are accounted for and paid over by the employer on behalf of the employee. The employer deducts the employee contributions from the salaries at source. In the case where foreign employees are paid directly from outside Spain and the employer has no establishment in Spain, then, it is normal to appoint a fiscal representative who becomes responsible for making the payments to the Social Security. Employee contributions are normally about 6,3% of the total salary of the employee, with maximum contributions established depending on the category of the employee.
Insured persons are the employees and their dependants. Normally the majority of medical expenses are reimbursed by the State and any excess is funded by the insured person or by a mutual insurance scheme (if the insured person has subscribed to such a scheme).
Maternity leave is 16 weeks. Women are entitled to 12 weeks leave for pregnancy and the additional 4 weeks leave may be taken. There are additional entitlements if prescribed by a medical specialist. The economic allowance is 100% of the daily basis of the Social Security contributions. This is paid directly by the Social Security.
In the case of work related accidents insured employees are entitled to a daily allowance equal to 75% percent of the daily basis of the Social Security contributions during the first twelve months of disability. This allowance may be extended for a further six-month period.
All employees who have contributed to the Social Security System for a minimum of 15 years (two of them during the last 8 years prior to retirement) are entitled to the statutory pension on reaching 65 years of age. The benefit decreases if the employee retires between the ages of 60 and 65. All benefits are a function of the insured's average basis of the Social Security contributions during the previous years for which contributions have been paid.
The pension provided by the Social Security ranges from 60% of the social security contributions base for employees with 15 years contributions and up to 100% for employees with 35 years contributions.
Early retirement may also be possible on the basis of specific agreements. In these cases, the employer must fund the pension to be paid to the employee until retirement age.
An increasing number of companies, in particular the larger ones, have their own pension schemes, which need to conform to a code of practice issued by the Spanish Fiscal authorities. Subject to certain limits, contributions by both the employer and employees are tax deductible, thus encouraging the formation of company pension schemes. Employees are permitted to opt out of their employer's pension scheme and set up their own personal scheme. Either the employer or the employees or both contribute to such schemes. Alternatively, either may bear the cost. Company pension schemes must be administered by authorised institutions independent of the management of the company.
Employees are entitled to claim unemployment benefit following redundancy. The benefits are paid by the State through the INEM organisation.
Corporate Income Tax is applicable to entities:
The rates applicable in 2002 (subject to change yearly by means of the Budget Law) are the following:
In common with most other EU countries, the general rule is that expenses must be wholly necessary for obtaining income for them to be tax deductible.
To be deductible for tax purposes, charges for royalties and technical services fees must be supported by a written contract, drawn up under open market conditions and giving details of the bases for establishing the amounts to be paid.
After applying the tax rate to the taxable profit, the following amounts may be deducted:
Tax credits are limited to 35% of the gross tax payable or 45% where the tax credit for R&D and technological innovation exceeds 10% of the gross tax payable. Deductions may be carried forward from ten to fifteen years.
Losses may be carried forward for fifteen years. Relief for tax losses is available only to the company and is not transferable. No loss carry back is allowed.
Withholding Tax suffered and advance tax payments must be included in the Corporate Income Tax Declaration for the year.
Withholding Tax is levied on dividends, interest and royalty payments at the rate of 25%, whether paid to residents or non-residents except when a Double Tax Treaty is applicable. The Withholding Tax is recoverable in full by residents and in part (depending on the Double Taxation Treaty) by non-residents.
Payments to professionals and self-employed people are subject to Withholding Tax at source of 15%.
Withholding Tax on wages and salaries is deducted at source by the employer (see 7.1.).
The Corporate Income Tax Declaration must be filed within 25 days of the last possible date for the shareholders to approve the financial statements (six months after the accounting year-end). Additionally, during the first 20 days of April, October and December, payments on account of the current year's Corporate Income Tax should be made. The amount of these payments can vary depending on the size and profitability of the company.
Groups of companies may consolidate their financial statements and be taxed on the consolidated income, if the shareholding of the controlling company amounts to 90% or more of the subsidiary companies and this has been maintained for at least the preceding year. Tax consolidation allows for losses in one group company to be offset against the profits of another group company; however, the consolidated status must be achieved before the losses are incurred.
Non-residents operating in Spain without a permanent establishment should appoint a person or a legal entity with residence in Spain to represent them before the Spanish Tax Authorities.
Non-residents operating in Spain with a permanent establishment do not need to appoint anybody because they are considered to be sufficiently represented before the Spanish Tax Authorities.
The current limit on the debt/equity ratio is 3:1 (based on the average fiscal equity. If the ratio is above this level, interest expenses will be treated as dividend payments and disallowed for tax purposes.
V.A.T. is an indirect tax levied on the delivery of goods, the rendering of services and the importation of goods and it derives from EC Directives on this matter.
At present, there are three V.A.T. rates (these may change every year when the Budget Law is approved):
Certain supplies or services are subject to VAT at the zero rate.
This is levied on capital transfers (general tax rate: 6% to 7%; company operations 1% and legal documents (notarised, commercial and administrative): 0.5%.
Local taxes are quite usual in Spain though not very high. Most are based on the surface area, the quality and the value of property. Every council, subject to certain limits, has full independence to determine the tax rates applicable:
Business Tax (I.A.E.). This is a municipal tax, payable every year; the amount depends basically on the activity of the company and the type and size of the premises. Other parameters may also be considered. Municipal Real Estate Tax. It is levied every year and depends on the size and ratable value of the property. Other minor local taxes are: Motor Vehicles Tax, Construction Tax and the Capital Gains Tax on the Transfer of Land.
The business records that must be kept are the following:
Annual Accounts book (Balance Sheet, Profit and Loss Account and Notes to the Accounts). Value Added Tax registers for invoices received and invoices issued. Any other auxiliary books that complement or explains the above books.
Minutes book (for Shareholders' meetings and for meetings of the Board of Directors). Register of Shareholders (only if shares are Registered Shares)
The accounting reference date is laid down in the Articles of Incorporation and it may be fixed at any date. Once established, the accounting year-end may be changed by means of amending the Articles of Incorporation.
The Commercial Code and the Companies Law determine the contents of the financial statements. Additionally, a General Accounting Plan, the implementation of which is, in part, mandatory for most economic activities was introduced by Royal Decree 1643/90.
Various adaptations of this General Accounting Plan have been published for different industrial sectors. In these sectors, the implementation of each specific Accounting Plan is also, in part, mandatory (e.g. construction, insurance, real estate companies and banking).
Business records must be preserved for five years and in Spanish or any other language with official status (See 1.1 above). Spanish authorities may require a certified translation into Spanish of those records maintained in another language. Accounting records must be presented in Euros.
Accounting principles are roughly the same as in other western countries and they are contained in various statutes and laws: Commercial Code, Companies Law, General Accounting Plan and the pronouncements issued by the Accounting and Auditing Institute (Instituto de Contabilidad y Auditoría de Cuentas).
The books and records of an organisation are open to scrutiny in the following cases: