In recent years, many freelancers and self-employed professionals in Spain have created companies to structure their business activities. While this is completely legal when done properly, some of these companies are what are known as shell companies, businesses that exist mainly on paper, without real employees, physical offices, or real economic activity. Their main purpose is often to artificially reduce the amount of tax paid.
However, recent rulings by the Spanish Supreme Court, as well as increased attention from the Spanish Tax Office, have made it clear that this type of structure will not be accepted when it lacks real substance.
What is a shell company?
A shell company is a business that lacks real operations, employees or assets. In many cases, it is controlled by a single person, who is often the same individual working as a freelancer. On paper, it looks like a company, but it is simply a formal wrapper with no independent economic activity.
This article specifically refers to Spanish companies set up by individuals who live and work in Spain. While some freelancers use foreign companies (for example, UK Ltd companies), these raise different tax issues. The focus here is on what is acceptable under Spanish law.
Why you cannot simply create a company while working only from home with a computer?
The Supreme Court rulings emphasize that a company must have real substance. This means:
- The company must have its own legal entity, with physical resources and hired personnel, not just a laptop at home.
- It must assume real business risks and serve multiple clients. The clients cannot be exactly the same as those of the individual shareholder.
- There must be a real economic justification for setting up the company, not just to reduce tax.
If you work alone from home and your company exists only on paper, the Tax Office may classify it as a shell company. This can lead to inspections, fines, and reclassification of your income, meaning you pay much more in taxes plus interest and penalties.
In fact, in 2023, the Tax Office conducted 5,812 inspections to detect hidden activity and abuse of corporate structures. This shows how seriously they are taking this issue.
Why do some freelancers create shell companies?
The main reason freelancers create shell companies is tax savings. In Spain, self-employees can face personal income tax rates as high as 47%. In contrast, companies generally pay a lower corporation tax rate, usually around 25%. This significant difference creates a strong incentive for freelancers to channel their income through a company that may not be real.
Another common reason is to protect personal assets. A self-employee is personally liable for business debts, which can put personal property like a home or savings at risk. A company can offer limited liability, meaning the risks are separated from the individual.
However, using a company in Spain is not simply a workaround to pay less tax. There are costs, responsibilities, and complex rules involved, and tax authorities are increasingly active in investigating improper use of these structures.
How is money taken out of a company?
Even when a company is legitimate, taking money out of it is not tax-free. You cannot simply move company income into your personal account. There are two main ways to pay yourself from a Spanish company:
- Salary – As a director or employee, you can receive a salary. The company deducts this as an expense before calculating its profit and corporation tax. However, you must pay income tax and social security on that salary.
- Dividends – After paying 25% corporation tax on profits, the company can distribute dividends. These dividends are taxed again in the hands of the individual at rates starting at 19%, meaning a combined tax rate of up to 46%.
This shows that tax savings are not always as big as they seem at first time, especially when personal income tax, social security, and dividend tax are taken into account.
There are also setup and maintenance costs, such as contributing share capital, complex bookkeeping, corporation tax filings, annual accounts, among others. For small self-employed individuals, this additional complexity may outweigh the benefits.
Conclusion
Setting up a Spanish company can offer advantages, but only when it is done correctly, with real business activity, resources, and proper tax compliance. Simply working from home with a computer and issuing invoices through a company is not enough.
The Spanish Supreme Court and Tax Office have made it clear: shell companies used only to reduce taxes are not acceptable. If your company has no real activity, the authorities may reclassify it, leading to higher taxes, penalties, and inspections.
Because of the complexity of the rules and the risks involved, it is essential to seek professional tax advice before deciding to form a company. At Spence Clarke, we can help assess your situation and guide you on the best structure for your business.
