As in any economy under the Welfare State, Spain collects taxes to finance its public spending. Health, pensions, public education … these are some of the areas supported through tax collection. But, which are the taxes that are paid in Spain exactly? In this post, we will summarize all the Spanish tax rates for 2019 and we will give you some tax advice so you can optimize your taxes.
ALL CITIZENS AND COMPANIES PAY TAXES
First of all, we must understand that both companies and citizens must pay their taxes compulsorily; as required by the Spanish tax regime.
Thus, the Spanish tax system is one of the most extensive in Europe, making Spain the fourth country in the entire European Union in the ranking of those with the highest percentages.
And in which way are Spanish taxes collected?
Until now, the general classification of taxes paid in Spain is divided into two types: direct taxes and indirect taxes.
- Direct taxes, (for example, the IRPF) or to the entities (Corporate Tax, for example); based on income and assets.
- Indirect taxes, on the other hand, are applied to economic transactions (for example, the VAT), recording services or consumer goods.
TAXES IN SPAIN ACCORDING TO HOW WE EXECUTE OUR ECONOMIC ACTIVITY
However, the tax rates that each one of us pays are different, and understanding exactly what taxes are paid will be something fundamental, among other things, when deciding between developing our economic activity as a self-employed individual or under a society. The monetary difference that results from the distinction can distort our choice and make us choose one option over the other, as it can be more advantageous for our particular case.
So, let’s see what are the types of taxes in Spain according to whether we are self-employed individuals or corporations:
TAXES IN SPAIN FOR SELF-EMPLOYED INDIVIDUALS
Taxation for the self-employed in Spain during 2019 is mainly composed of 5 different taxes, direct and indirect:
PERSONAL INCOME TAX (PIT) or IRPF
Personal Income Tax operates on income obtained during the whole year by Spanish residents. It is a progressive tax; that is, its percentage increases as our income goes up. How much is paid in terms of PIT in 2019? Well, this tax rate starts at 19% in the most basic level, reaching a maximum of 45% from 60,000€ on income and onwards.
Property Tax (IP)
This tax, paid once a year, is paid according to the business assets that are under our name. If, for example, I have a place where I conduct my economic activity (let’s say my office space), I must pay property tax for it. If I use a computer, too. We find here a territorial distortion because individuals in different autonomous communities will not pay the same in regards to the IP: in the community of Madrid, for example, it is not paid.
Inheritance and donations tax (ISD)
Every time a business passes into the hands of another person, whether due to inheritance or donation, the new owner must pay the inheritance and donation tax. It is a tax assigned to the autonomous communities, and there is a certain territorial inequality: there are communities in which this tax is higher than in others.
VAT (Value added tax)
This indirect tax, the well-known VAT, charges consumption and transactions. It is not a subjective tax since it is paid according to the activity that we do as individual entrepreneurs: certain activities have it and some do not. In this case, VAT is not a differential factor between exercising as a freelancer or as a company, since it is a tax that is paid regardless of the legal form.
Non-resident income tax (IRN)
The Non-resident Income Tax is for, as its name indicates, the income of those individuals who do not reside in Spanish territory. That is, it applies to those people who generate income in the Spanish territory, but operate outside it. A person who lives less than 183 days per year is considered a non-resident.
If you are interested in knowing how to optimize your taxes in Spain as a non-resident… Do not miss our post about the Beckham Law in Spain!
TAXES IN SPAIN FOR COMPANIES
The collection of taxes in Spain during in regards to companies includes two extra taxes to those previously seen while maintaining the VAT:
Corporate Tax (IS in Spanish)
The Corporate Tax is a direct tax that collects a % of the result of the economic activity of a company. Unlike Personal Income Tax, it is a single tax of 25%, a flat and non-progressive rate. That is, whatever the company earns, it will always pay 25% on the benefit.
Tax on property transfers (ITP)
The tax on property transfers records the different operations that take place during the life of a company, for example, capital increases or decreases, mergers, divisions, etc.
Thus, we see how the main difference between carrying out an economic activity as a self-employed or as a society lies mainly in the progressivity of the PIT vs the fixed rate of Corporate Tax.
As a general rule, although in practice there are many more factors to take into consideration (such as taxes generated by the collection of dividends), we can assume that at low-income levels it is more advisable to operate as an individual entrepreneur, while at higher levels of income, operating under the structure of a company supposes saving taxes.
DO YOU WANT TO OPTIMIZE YOUR TAXES IN SPAIN THIS 2019?
Now you know what are the main taxes paid in Spain, both for individuals and for companies.
If you are considering setting up a company or already have one, it is very likely that you are not optimizing your taxes and you are paying more than you should.
Do you want to know how to pay fewer taxes in Spain? Well, let us help you. Ask for an appointment with us so that our lawyers specialized in tax law can analyze your situation!