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).

2. Liability
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.

3. Taxation
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.

4. Social Security
For an SL, the costs start at €350 per month (with the new regulations entering into force in January 1st 2023, the amounts to pay for Directors of SL to the Social Security will decrease and this cost will start at 310€ per month). The company director must register with Social Security.

Autonomos are normally eligible for a discounted rate for the first two years (however this depends on the field of work). Furthermore, they may also be eligible for a discount in the third year depending on field of work and age.

The Spanish Government brought in new regulations which will commence January 2023. These regulations will change the Autonomo social security payment structure so that the more the Autonomo earns, the more social security they will pay. For lower earners, they may find that they will pay less than they currently do. However, for higher earners, they may find that they will pay more.

5. Financing
It may be easier for an SL to secure financing and more opportunities may be available. Banks and lenders tend to have more confidence in lending to an SL as opposed to an Autonomo. Due to the way an SL is set up, they are generally seen as more solvent.

6. Accounting
An SL is subject to Plan General Contable (general accounting standards) by the Spanish Government. This is a much more complete accounting process. Documentation must be maintained for all financial operations. Annual Accounts must be submitted in the Mercantile Registry annually. Furthermore, Corporate Tax must be paid annually, and VAT must be paid quarterly or monthly depending on the level of income.

On the other hand, the accounting practice required by Autonomos is simpler and straightforward. They are required to submit all sent and received invoices, with quarterly declarations for IRPF and VAT (if VAT applicable). They are also required to make an annual declaration by the end of June each year.

Costs of becoming Autonomo in Spain

Social Security
A self-employed person that has applied for a reduction in the Social Security Contributions because they started their activity before January 1st, 2023 will pay a flat fee of €68 a month for the first 12 months. They will then be eligible for a 50% reduction over the next 6 months. Following this, they can claim a 30% reduction for the subsequent six months. The self-employed worker will start paying full social security contributions after 2 years has passed.

These contributions to the Spanish Social Security system, from January 1st, 2023, will start at 281,50 Euros, although they will be also able to request a reduction for the first 24 months. They are entitled to an 80% reduction during the first 12 months, a 50% in the following 6 months and 30% during the remaining 6 months. After that, a 100% of the contribution must be paid. There is an additional 30% reduction for a further year for male freelancers under 30 years of age and female freelancers younger than 35 years old.

Autonomos over the age of 65 who can prove that they contributed into the social security system for at least 36 years and six months are exempt from paying the full Social Security contribution indefinitely.

The above costs are the only start-up costs required for anyone who wishes to become autonomo. The only initial start-up cost would be the Social Security payment, as detailed above.

Income Tax (IRPF)
Autonomos must pay tax on their profits. There are certain rules on the deductible expenses for a freelancer. Please see the link to this article here on what expenses you can deduct as an autonomo. The differences in the deductible expenses between an Autonomo and a SL are supposedly none. However, using a company credit card for expenses seems more ‘open minded’ than what an autonomo’s receipts can be made up of. After determining profits, there is a 20% additional reduction on the taxable income for the first 2 years. This taxable income will be subject to the progressive tax rates of the general income in the Personal Income Tax that, as stated, can be higher than 50% in the highest bracket, in certain regions.

Also, on a quarterly basis, the Autonomo must pay 20% of the quarterly profits in advance, taking into account of the final annual tax liability levied on the freelancing. This amount will be deducted from the annual tax liability, once determined.

Costs of starting an SL in Spain

Social Security on a director
The company director of the SL must pay social security contributions and these start at €350 per month. However, the reductions in the Social Security contributions (80%, 50% and 30%) will be applicable if certain requirements are met.

Corporate Income Tax
15% in the first 2 years on the profits, if the company is new and the activity has not been carried out before by the director or by another related company. After that, there will be a Corporate Income Tax rate of 25% of profits

Making the choice

It very much depends on your personal circumstances. In general, if you have 3 directors/employees or more and an annual income of 80k then an SL could be the best option. However, this should be determined on a case-by-case basis and very much depends on your personal situation. It is always recommended to take professional advice to establish if this is the correct decision for your business.

The main factor is how much money you make (or will make) and the size (or size to be) of your business. It is much quicker, easier and cheaper to become Autonomo so if you are starting out and you do not have a clear idea of how much income will be generated, this may be the best option. However and as an example, if you would like to sell shares, take on employees or increase the number of partners then an SL might be the better option. An SL may also portray an image of a larger, more professional and solvent business when compared to the Autonomo set up. As a result, if you plan on working with large, established companies then you may find the SL route the better option.

Finally, you cannot establish an SL and then change to Autonomo. If you want to change to Autonomo when you have established an SL, first you need to liquidate the SL. It is much easier to go from Autonomo to SL. It may make financial sense to do this as you may end up paying a reduced rate of tax. SL’s pay a flat rate of 25% (15% for the first year in which the company has profits and the following year), however if you are a high earning Autonomo then you may find yourself paying up to 47% (50%). The general consensus is that it makes sense switching from Autonomo to SL once you are consistently making profits of more than €80,000 per year, or taking into account all other factors.

If you would like to speak with a Financial Adviser in Spain, Chris Burke is experienced, qualified in personal financial matters. Chris can review your current pensions, investments and other assets, with the potential to make them more effective and tax efficient moving forward. Don’t hesitate to get in touch with Chris via the form below – or click the button below to make a direct virtual appointment here.