One of the most frequent enquiries we receive from individuals who have recently moved to Spain involves questions concerning the continuing use of their UK limited company for business income. Many have been accustomed to using a limited company because the tax and social security treatment is favourable in the UK system.
Spanish corporation tax
The first snag is very fundamental. Under Spanish corporation tax rules, if a UK company is managed from a Spanish location then the income it generates is subject to Spanish corporation tax. The UK/Spanish double tax treaty agrees with this treatment.
In many cases the UK company has a single shareholder and director and no place of business, except the individual’s home address. Consequently, when the individual moves to Spain they inadvertently cause the UK company to become subject to Spanish corporation tax.
This will cause significant problems. Although similar, Spanish corporation tax rules are not the same as in the UK, quite apart from the minimum tax rate being higher at 25%
In the event that the Spanish tax office becomes aware of the situation, it will issue tax assessments on the company. The tax rules do not allow UK tax paid to be set off against Spanish corporation tax, so an application has to be made to get UK corporation tax repaid but, in the meantime, Spanish tax has to be paid. It could easily take a year or more to sort out the mess and it would be expensive in terms of advice needed in the UK and in Spain.
Tax prescription rules in Spain allow the tax office to go back up to 5 years.
There are solutions that would prevent this problem from occurring but each case is different so we cannot give general advice that would be useful.
Changing the business to Spanish self-employment
For many individuals the simple solution is to get rid of the UK company and set up in Spain as a self employed person. This couldn’t be easier as closing down a UK company that only charges fees for the work done by its owner is a simple and quick process. Setting up as self employed is also quick and simple.
The tax and bookkeeping formalities for a self employed individual are also very straightforward and exposes an expat to very few pitfalls in the seemingly complex Spanish system.
One disadvantage is that the Spanish system is very ungenerous when it comes to being able to deduct expenses. Against, this the self-employed are allowed to deduct up to 2.000€ for “costs of difficult justification”.
Another potential disadvantage is that all income generated by a self-employed person is treated as earned income, which is subject to higher tax than applies in the case of dividend income. However, in the Spanish tax system, receiving dividends actually costs more tax, unless a person is earning over (approximately) 80.000 Euros p.a.
A further advantage of being self employed in Spain is being part of the Spanish social security system. This provides full access to the national health and benefits system for the individual and their family, as well as pension rights. Making contributions to the Spanish system for a minimum of 15 years will provide a retirement pension to complement UK pension rights. A full pension in Spain requires 35 years of contributions.
So, for many, switching to self-employed is often the best solution.
By the way, some individuals are reluctant to exit the UK social security system because they want to protect their UK pension rights. This should not be a problem because an individual may continue making contributions to the UK system by paying Class 3 national insurance contributions. These can be paid or annually, approximately £800 for a full year of qualifying contributions, or payments may be made by monthly direct debit.
Setting up a Spanish company
For a simple business activity where a person who is just charging fees and there are no commercial risks, such as those that arise from employing staff, buying and selling goods, having trade creditors and debtors etc, having a Spanish company would not be a good idea. This would be ‘using a mallet to crack a nut’.
This is because Spanish bureaucracy makes setting up, running and getting rid of companies expensive when compared to the UK.
Of course if it is sometimes essential to have a company for limited liability and other reasons that make such complications are worthwhile. Examples of good reasons are the need to have limited liability and providing a commercial image, as some regard a self employed business as insubstantial.
So, switching to a Spanish company may suit some situations.
When having a UK company continues to make sense
In a good proportion of situations, keeping a UK company is the best option.
The existing business may have a long trading history in the UK, customers, suppliers, bank accounts and other commercial relationships that should not be disturbed. It may be that it is important to keep a visible UK status even if the owners/directors of the company have decided to live or spend most of their time in Spain.
If the company has in the UK a place of business, employees, stock, physical assets, then of course it would make perfect sense to keep an existing UK company. To disturb the the company’s arrangements simply because the directors/shareholders have decided to live in Spain should be unnecessary but nevertheless, some steps may be required to prevent problems with the Spanish tax office.
Taking income from a UK company – existing tax efficient strategies do not work in Spain
It is very common for the directors/shareholders of a UK company to receive a small annual salary with the majority of their income being received as dividends.
This strategy is designed as being very tax and social security efficient for the UK social security system but it does not work in Spain.
Salaries and dividends are not taxed in Spain in the same way as the UK. In Spanish system receiving a salary of up to 80.000 Euros, with additional income in the form of dividends, is usually the lowest cost strategy.
A good alternative to receiving a salary from the UK company is to register as self employed in Spain and issue invoices to the UK company for services rendered. This provides a very simple way of receiving income from the UK company and at the same time registers the individual and their family in the Spanish health, benefits and pensions systems.
No article on a complex subject such as this would be complete without mentioning possible problems caused by Brexit.
UK nationals who were not resident before 31 December 2020 will not be able to work in Spain without first obtaining a work permit. Not having a work permit prevents registering as self employed in Spain and so restricts the options described in this article.
An individual might therefore be forced to obtain a non-lucrative temporary residency visa in order to live in Spain. This is more of a short term inconvenience because after the five years temporary period the individual can apply for a permanent, visa which enables working is Spain as self-employed or employed.
What must be obvious is that the subject is relatively complex and the various options need to be examined and discussed before deciding how best to derive income from a UK business.