Before you start trading, you need to inform the tax office that you will be commencing a business activity. This is done via a census return; in that document you will inform the tax office of the following:

• Name, address and identification number
• Date of commencement of trade
• Description of activity to be carried out
• Whether your activity is subject to VAT or falls under one of the special categories
• The type of profit calculation and taxation system applicable to your trade (some trades fall within business modules that are taxed at fixed rates regardless of volume of business)
• Whether you are obliged to present quarterly returns on your profits to date
• Whether you have business premises, and if so disclose full details
• Whether you will be importing or exporting and as such wish to be registered on the EU traders list

It is essential that you do register before any activity takes place, even before you start generating sales, as any expenses incurred prior to registration will not be tax allowable in respect of your business profits. You are also obliged by law to notify the tax office of your commencement of trade on the first day of your activity. If you fail to do this you may be subject to a fine.
The second element of your registration is to notify the social security office of your commencement of trade and register as a self-employed individual. From the moment you register you will be liable to pay your monthly national insurance contributions.

Many of the surprises and frustrations arising when starting in business in Spain for the first time arise due to a lack of awareness regarding the local compliance system. Make sure you have understood all the aspects that are relevant to your particular trade before you start; this will be the best way to ensure a trouble free commencement. Our welcome book aims to tackle this issue and hopefully should answer many of your questions, however if in doubt always ask, we are here to help.

As an individual, you are not obliged to maintain records which include a balance sheet. Your minimum obligation is to maintain records of all your sales and business expenses; in a way that meets the required standards (please refer to the invoicing section for further details). Of course, even though you are not obliged to maintain a balance sheet, you may benefit from it as it will help you manage your business more effectively. In particular, if the volume of transactions is high and you either buy or sell on credit.

In some instances, your corporate clients will be obliged to withhold some of your fees which will then be paid over to the tax office as income tax on your behalf. Let’s consider a simple example:

The standard rate of withholding tax in Spain for professional sole traders is 15%, however, during your first two years you may opt for 7% retention instead. Beware, for start-ups with a high volume of costs, this option will help your cash flow availability and thus your chances of success. However, if your cost base is low, opting for the 7% will lead to greater payments on account when the quarter comes to an end. Our advice is that if your profit margins are high and you are have difficulties setting money aside to pay your taxes, it is better to suffer a 15% retention as any balancing payments due will inevitably be lower.

As any other business you will need to report to the tax office on a quarterly basis by filing the relevant returns including VAT, IRPF or informative returns. In addition to the general obligations that apply to all businesses, regardless of their legal form, you may be obliged to file a return disclosing your accumulated profits for the current year. Meeting the deadlines set by the tax office is essential as any late filing will lead to a fine and interest charges.

Generally, when a profit has been made, you will need to pay the tax office 20% of these reported profits as a payment on account of your personal income tax. This may come as a surprise if you were used to making payments on account in your home country only twice a year. However, you may appreciate the benefits of this system as you are less likely to face large tax bills on an annual basis. A simple example of your quarterly tax return would look as follows:

Once the year has come to an end, you will have to file a personal income tax return. This return will combine all of your sources of income, including your business profits, and all of the tax reliefs you are entitled to as any other resident individual.

When your final tax liability for the year has been ascertained through this process, you will either have to make a balancing payment or request a tax refund.

A balancing payment will arise if your tax liability is greater than any payments on account already made through the system noted above. Bear in mind that the maximum payment on account suffered will have amounted to 20% of your business profits, and that the higher earners in Spain are taxed up to 48%.

A refund may be requested if the withholding tax suffered exceeded your liability once other reliefs, such as mortgage costs, have decreased your taxable base leading to an effective rate of tax below 20%.