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Working for a UK company? Where should you pay social security?

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In other articles we have discussed the recent phenomenon of people living in Spain but working for a UK or other foreign employers. As we have explained, there seem to have been two strong influences, Brexit causing people to formalise their Spanish resident status and Covid-19, which has forced home working and stimulated the widespread acceptance of new technologies, such as remote desktop applications and video calling.

As 2021 drew to an end we did not seen any reduction in this trend and in 2022 we continue to receive many enquiries on how best to handle the formalities involved. One of the more complex problems that has emerged relates to understanding to which country a person should make social security contributions.

Sometimes the persons who are remote working are directors working for their own companies in the UK, sometimes a more normal employee/employer relationship exists. These different situations result in radically different treatment in the Spanish social security system.

The basic rules

Quite simply, the basic rule if you live in Spain and work for a foreign based employer, then social security on your salary must be paid in Spain. Neither you nor your employer can choose where to pay social security because you prefer one system to the other.

There is only one exception to this rule, which applies exclusively in the case that an employee is seconded to work Spain. This exception, inevitably, invites speculation as to where the boundaries lie in the definition of secondment. It is best that we eliminate such speculation and state that the secondment of the employee must be real and the the activity of the UK employer in Spain must be apparent and demonstrable. There are formalities too, so that the Spanish labour authorities can check up, including that secondment having to be reported, and the secondment cannot exceed 24 months.

One of the tests that are used to test the validity of the secondment is that the UK company must be able to show that it has a material activity in Spain.

If no secondment applies then the UK employer must:

  1. Register in Spain as an employer in the social security and tax system.
  2. Deduct and pay over Spanish social security and income tax from the employee’s salary.
  3. Pay employer’s social security contributions.
  4. File social security returns monthly and quarterly and annual tax returns for the income tax withheld from the employee.

In order to deal with these formalities the employer must appoint a representative in Spain, providing a formal power of attorney that will authorise the representative to apply for a tax reference number for the employer company and the director who has signed the power of attorney, as well as dealing with all the registrations and ongoing tax and social security filings.

Company directors and substantial shareholders

The basic rules described above apply to all employees which include directors but there is a major variation in the case of directors or employees with substantial shareholdings in the employer company.

Spain has an unusual social security system for company directors, who are also shareholders with at least 25% of the share capital of the employer company, in that they are excluded from the general social security regime for employees and are instead subject to special self-employed regime known as ‘Autonomos Societarios’.

In practice this signifies is that usual employee/employer social security contributions of 6% and 30% (very roughly) of gross salary are replaced with employee only contributions that cost a minimum of 370€ per month. A person may elect to pay more than this minimum to enhance future pension rights.

The same regime also applies to non-director employees who own at least 33% share capital of the employer company and employees who together with their close and co-habiting family own at least 50% of the employer company.

All such individuals are entitled to claim the reduced contributions regime that apply to the newly registered self-employed, which results in a 60€ per month flat rate cost for the first 12 months and further discounts in the second year.

Note that the Autonomo Societario social security contributions are higher than the normal self-employed contributions of approximately 280€ per month.

A further very peculiar twist for company directors

Company directors who are ‘professionals’ and working for their company that is also engaged in the same ‘professional’ activity are subject to a baffling tax regime because the tax office has interpreted tax regulations to require that they should invoice the company that employs them for the amount they draw each month as salaries.

Because they have to invoice their companies, they have to charge IVA (VAT) at 21% and apply income tax deductions (usually at 15%) to their invoices. This only applies in the case of Spanish companies as, in the case of a UK company, IVA will be exempt as the invoice would be charging for an export of services and the 15% income tax withholding will also not apply as the UK company is not in the Spanish system.

In addition they have to submit at least 10 additional IVA and income tax declarations each year. These tax filings apply even if the company that is invoiced is in the UK.

Here things get even muddier and this is because it has taken over 10 years to make sense of the tax office’s interpretation. We make no apology for this apparent nonsense. That’s why practising our profession is so much fun in Spain!!

Note that the word ‘professional’ in Spanish does not just relate to lawyers, accountants, surveyors, etc., but has a much wider definition including qualified trades like plumbers, electricians and many other activities.

Its best that I give actual examples of the situations that give rise to the obligation to ‘invoice’ salaries, as trying to define in words will only cause more confusion.

These are examples of when a ‘professional person’ is working for a company that is exercising the same ‘professional’ activity, requiring that the person formally invoices the company .

  • A lawyer who is a 25%+ shareholder/director of a company that itself provides legal services
  • An accountant who is a 25%+ shareholder/director of a company that itself provides tax and accountancy services
  • A plumber who is a 25%+ shareholder/director of a company that itself provides plumbing services
  • A computer programmer who is a 25%+ shareholder/director of a company itself that provides computer programming services

Here are a few examples of where invoicing the company is not required and the person should receive a conventional payslip to match the salary they draw out from the company:

  • A property valuer who is a 25%+ shareholder/director of a company that provides building services
  • An unqualified person who is a 25%+ shareholder/director of a company that provides legal services
  • A computer programmer who is a 25%+ shareholder/director of a company that provides web hosting services
  • A, accountant who owns less than 25% of the company that provides accounting services.
  • A lawyer who is a 25%+ shareholder/director of a company that provides marketing services.

It is pretty obvious that the Spanish Administration does not believe in making things simple and to be absolutely frank, we cannot see any particular advantage for the tax office to force this system on persons who work for companies where they are substantial shareholders.

The Self-employed or ‘Autonomo’ option

If matters are not confusing enough there is an option which can work in limited circumstances. This involves a person who lives and works in Spain being registered as self-employed. In Spain this is called being an ‘Autonomo’.

This is often recommended as a ‘one-size-fits-all’ solution with no explanation of the pitfalls, and unfortunately there are serious pitfalls with this choice.

First and foremost, the Spanish social security office is perfectly aware that Autonomos pay a lot less social security than applies to normal employment. At the top end, in the case of a salary of 50.000€ p.a. or more, Autonomo contributions are 15.000€ cheaper than applies to a salaried employee. Imagine how upsetting it would be to receive a social security assessment for 4 years x 15.000€, plus fines of at least 20%.

The social security office is currently actively investigating the self-employed for ‘Autonomo falso’ situations because they are aware of the abuse and underpayment of social security contributions.

Spain is no different to the UK and other countries and where a person has a single employer it is hard to get away with being treated as self-employed.

In summary

This Spanish system creates a highly complex and potentially anomalous situation for persons who work companies. Trying to simplify matters as much as possible we finish up with these three situations:

  1. The simplest situation of a non director/shareholder employee is clear enough: Unless validly seconded to Spain the employer and employee must contribute to the Spanish social security system, and there are no exceptions.
  2. In the case of director/25%+ shareholders then the normal Spanish social security system does not apply and instead the fixed cost Autonomo Societario system applies, and there are no exceptions.
  3. In the case of director/25%+ shareholders AND the individuals role in the company and the activity are both ‘professional’ activities then in addition to the Autonomo Societario system applying, the director will have to invoice their salary and deal with all the tax filings involved.
  4. Beware of the seemingly simple and attractive option of pretending to be self-employed. Detailed and written advice is absolutely required.

Spence Clarke & Co specialises in the provision of Spanish tax, legal, audit and accountancy services, mainly to foreigners with interests in Spain. Our cross-border knowledge helps clients adapt to the Spanish system with the minimum of doubt and disruption. If you have any questions about this article or any other matter contact us, with no obligation, to see how we can help you.