After the recent news from the Spanish Government that they are set to change the Autonomo tax payment structure, many questions have arisen. The main questions surround if it will be cheaper, easier and more effective to start an SL than be Autonomo. In this article, I aim to answer this question and clear any doubts that you may have.
What is an Autonomo?
Autonomo is the Spanish word for freelance or self-employed individual. If you provide some kind of service (irrespective of what this is), you need to register as an Autonomo.
What is an SL?
An SL (Sociedad Limitada) is the equivalent to a Limited Liability company, a private limited company (or ltd) in the UK.
What are the main differences between an Autonomo and an SL?
The 6 main differences are:
1. Set Up
To create an SL, there are several steps which must be taken. Firstly, the initial investment required to set up an SL is a minimum share capital contribution of €3000 (according to the recently approved Law 18/2022, of 28th September, also known as “Ley Crea y Crece” the minimum share capital contribution will be €1, as long as the company complies with the requirements approved). The next steps include registering the company with the Mercantile Registry (Registro Mercantil Central), signing a public deed at a notary office and allowing for additional tax documentation.
On the other hand, becoming Autonomo is much more straightforward. No initial investment is required and the process is significantly faster and easier. You must register with the tax authorities (Agencia Tributaria of Hacienda) and with Social Security (Seguridad Social).
An SL is incorporated as a separate legal entity. It is distinct to the entity of its owner(s) and partners. This means that the shareholder’s liability is limited to the capital invested in the business. The personal finances of the owners/partners would not be affected if the SL was to go under. However, Directors of the company are liable (with all their personal wealth) against the creditors, the shareholders, for their actions taken through the company both legally and financially.
However, Autonomos are responsible for all business debts. There is no legal separation between the company assets and the personal assets. As a result, there is more risk in the form of personal property, savings and possessions.
An SL, as a legal entity, is subject to corporate tax (Impuesto de Sociedades) at a fixed rate of 25% of profits. A discounted rate of 15% over profits may be available for newly established companies in their first two years of operation (the first year in which the company has profits and the following year).
Any transaction that the company might carry out with related parties must be at the market value e.g. the remunerations paid to the Administrator.
In case the shareholder/s is a person developing a professional activity, the Spanish Tax Authorities require that at least a 75% of the profits of the company must be paid to the professional shareholders. Therefore, in the end only a 25% of the profits of the company benefit from the lower tax rates in the Corporate Income Tax with respect to the Personal Income Tax. If you could not prove that the company has its own personal and material resources, the Tax Authorities could argue that 100% of the profits of the company must be transferred to the professional shareholders.
Autonomos pay IRFP on their net income, after associated business costs. The tax is progressive in the sense that the higher the income, the higher the rate of tax. The tax rate results from adding the Spanish tax rate and the one approved in each region (“Comunidad Autónoma”). For example, in Catalunya the tax rate ranges from 7% (20%) all the way up to 47% (50%), if your annual income reaches more than €300,000. The type of business activity that the Autonomo carries out affects the rate of tax. In the first two years there is a 20% reduction in net income as long as in the year prior to starting the new activity you did not develop.
With regards to IVA (VAT), the rate is the same for both SL and Autonomos.