Being a director of a Spanish company with 25% or more of the shareholding of the company results in unusual social security and tax obligations.
Directors actively working for a company with 25% shareholding or more are treated as self employed.
Strictly speaking they are treated as Autonomos Societarios which results in social security costs being more than an ordinary self-employed person. The typical contribution for a normal self- employed person is in the region of 290€ per month but an Autonomo Societario must pay a minimum of just under 380€ per month. Individuals can pay more to increase their pension and other rights.
The higher charge is due to the fact that the Autonomo Societario is considered equivalent to an ordinary Autonomo who has ten employees. The higher contributions result in higher pensions and other benefit rights.
Any company that has a business activity must have at least one director who is in the Spanish social security system. The only situation when this can be exempted is when at least one employee of the company is in a high category of employment and has the necessary authority to manage the basic requirements of the business. This exception is important where a director spends less than half the year in the country and is not tax resident in Spain.
The tarifa plana is a scheme whereby a newly registered self employed person pays a lower social security rate for the first two or three years (depending on age and gender) of their new activity. The scheme was first introduced in 2003 by the centre right PP Government José María Aznar and has undergone many changes over the years.
Although the idea of the Tarifa Plana was to stimulate new businesses creation, the Social Security authorities denied the application of the scheme to Autonomos Societarios, simply because the legislation failed to mention this type of Autonomo. The logic of this was lost on everyone, including the Supreme Court, which ruled against the Government in 2019. Happily for new businesses, there is no doubt today that newly registered directors can claim the reduced social security contributions for the first two years.
Under current regulations, Autonomos Societarios get an 80% discount for the first 12 months making their contributions just under 80€/month for the first twelve months. The discount reduces to 50% for the next six months and then 30% for the last six months.
Although no Social Security filings are required for an Autonomo Societario, because contributions are fixed each month, we still recommend that an Autonomo Societario has a monthly payslip for the income they draw from the company, just like normal employees. We have seen many examples where payslips are not produced and as a result the bookkeeper simply allocates the income drawn by the directors to a loan account.
Not only is this grossly tax inefficient because no use is made of each directors tax free income allowances (they total almost 15.000€), but the accumulated loan that will arise will be treated by a tax inspector as dividends and will be assessed at 19% income tax, plus fines and interest on the entire directors loan account balance. We have seen many serious cases of defective directors loan accounts, and some as high as 400.000€ in one company. This made for an unpleasant tax surprise for those directors.
Professional services companies
The directors of some types of business have to cope with a particularly strange problem.
The tax office requires that in some cases, the director must invoice fees to the company instead of receiving a salary via a payslip.
Unfortunately, this means that the directors of such companies must register as self employed in the tax system and invoice fees adding IVA (VAT) at 21%. They must also apply an income tax (IRPF) deduction of 15% on their invoices. Finally, they have to file no fewer than 10 additional tax declarations, made up of 4 quarterly income tax returns, 4 quarterly IVA returns and 2 further annual returns.
This regime applies when a company invoices professional services and those services match the professional qualifications of the director. It is perhaps easier to give a few examples where this regime applies:
- A plumber uses a company to invoice customers where the director/shareholder is also a plumber .
- A lawyer uses a company to invoice clients where the director/shareholder is also a lawyer .
- A dentist who uses a company to invoice his patients.
- A sportsperson or performer uses a company to invoice their fees.
The main reason that the tax office requires that a director invoices their company is because of the practice of sheltering profits by using a company. A company pays maximum corporation tax of 25% but an individual can pay as much as 50% on income.
It is a further requirement that at least 75% of the profits of such a company are invoiced by the director/shareholders, leaving no more than 25% as accumulated profits in the company. This rule limits the sheltering of profits. However, it can still be worthwhile to use a company for such businesses, especially when profits fluctuate a lot one year to the next, as profits from a good year can be taken out in a following year when profits are low. More simply, accumulating profits at a tax rate of only 25% per annum remains worthwhile.