Some tips for contractors getting started in Spain
This guide is intended as an introduction to the Spanish system for professionals and workers who get a contract in Spain. It is aimed at those contracting on a medium term basis where the work is for a decent length of time (say more than 6 months) but not necessarily permanent. Excluded from the scope of this article are contractors who live in Spain but contract abroad; we are concentrating here on work physically located in Spain.
We will cover: 1. Registering to work in Spain
2. Types of contracts
3. Choosing self-employed versus employed
4. Spanish social security for contractors
5. Taxation of contracting income â€“ basics
6. Taxation of contracting income â€“ strategies
1. Â Registering to work in Spain
EU citizens do not have to do anything special like obtain a work permit when they arrive in Spain to take up an employment opportunity. However there are two general requirements of foreigners moving to Spain for any purpose which must be observed:
a) Get a Numero de Identificacion de Extranjeros (NIE number â€“ pronounced â€śnearâ€ť). All Spaniards have a national identity number called a DNI; this is the foreignersâ€™ equivalent and is indispensable for almost every piece of official business attempted. See the Advoco guide to the Spain NIE number here.
b) Sign the foreignersâ€™ register. This is a requirement of anyone planning to spend 90 days or more in Spain. Once done you get a certificate which is often referred to as a residencia or residency certificate. This is not to be confused with tax residency which is a separate registration and subject to different rules. As you will see from the Advoco Spanish residency guide , you can do the NIE and foreignersâ€™ register together and it is fairly straightforward.
Contractors from outside the EU will need to get a working visa and get a residency card before they can start work. Often the sponsoring employer will sort out these considerations.
2. Types of contract
When someone is offered work in Spain, it usually involves them becoming employees (on the companyâ€™s payroll) or self-employed (remaining independent and selling their services to the company). To some extent it is the contract providers who will decide the choice of contract type in particular if it is a Spanish company (or Spanish subsidiary of a foreign group) that is offering the work.
If they put the contractor on their payroll, the Spanish company will do the formalities: setting up the employment contract, processing the monthly salary and appropriate deductions.
There are many different types of employment contract used in Spain and they are discussed here in Advocoâ€™s guide to Employing Staff in Spain. For most contracting situations the choice will be between an indefinite full time contract (idefinitivo) and a fixed term contract. Mostly the choice will effect the employer rather than the employee in terms of employerâ€™s social security and various incentives paid by the government for taking on workers. However the employee gets varying amounts of job security under the different contracts (e.g. indefinite contracts offer statutory redundancy pay after a year).
In cases where the company expects its contractor to remain independent, the onus may be on them to set up as self-employed and invoice the company for their services. As you will see from the tax and social security sections this puts a much greater burden on the contractor to get things right. It is not unusual for employers to offer work on this armsâ€™ length basis and for the contractor to get into problems because they are not given any guidance on how to administer their self-employed status and deal with the tax and social security obligations.
If you take a contract as an independent then, it is worth reading up on self-employment in Spain. The self-employed are called autonomos in Spain and Advoco has published a full guide to the Spanish autonomo system together with a short introductory video clip.
3. Choosing self-employed versus employed
Often Spain-based contractors are working for a foreign company with no corporate presence in Spain (like a subsidiary), for example because the contractor is going to be their foreign rep in Spain or because it is IT work that can be done anywhere and the contractor wants to live in Spain. In this case the contract provider is not likely to know the Spanish system and the setup may be open for negotiation.
Both the self-employed/autonomo and employee routes are possible. Either the contractor sets up as autonomo and invoices the provider or the provider has to register as a Spanish employer and start a payroll in Spain to put the contractor on. This latter step sounds cumbersome but can be done relatively simply through a Spanish payroll agency. The foreign company doesnâ€™t have to actually set up a presence in Spain like a branch.
If it seems you do have a choice then it is worth bearing in mind that you have to be genuinely self-employed to set up as such. Since the passing of the Estatuto del trabajo autĂłnomo or Self Employment Law in 2007, employers have been forbidden from making employees work as independent self-employed without employment contracts (called â€śautonomo falsoâ€ť). So if you are working exclusively for one business and in other ways are more employee than actually independent, then there is the possibility that simply setting up as autonomo is not appropriate.
If a contractor is in a position where the decision (employed versus self-employed) is up for negotiation then there are some arguments in favour of choosing employment: the administrative burden falls on the employer, income from employment gets an additional tax allowance and for most workers the social security cost will be lower. That said, if the contract provider pays more to cover the burden of setting up as autonomo, then the independence and control offered by being self-employment might be desirable.
4. Â Spanish social security for contractors
Anyone working in Spain, whether self-employed or employee, must register with the Social Security office (INSS). The employer is obliged to take care of this formality for employees of course and make the appropriate deductions from salary.
The rates payable depend on the contract type (see INSS website here Spanish social security rates) but a typical full time worker pays roughly 6% with the employer paying approximately 32%.
Autonomos may have to sort out social security themselves once they have registered as self-employed with the tax office (Agencia Tributaria). First you request a social security number (you need your NIE, passport and a permanent address to do this) and then join the special social security regime for autonomos (RETA). Advocoâ€™s range ofÂ autonomo services includes a registration service which assists with all aspects of the set-up.
There is an Advoco guide to Spanish Social security and the autonomo guide includes a section on social security for the self employed here.
Most autonomos pay a monthly minimum rate (in 2015 this is â‚¬264) though there is currently a low-start tariff available to most people. Over 50s pay around â‚¬20 a month more.
5. Â Taxation of contractors â€“ basics
If a contract is on offer the contractor needs to know the tax liability he or she will face in order to assess its true after-tax worth. This site has two pages, one dedicated to tax rates and allowances and one to a description of income tax, which should allow most people to assess their liability to Spanish income tax:
Spanish tax rates 2011 Spanish income tax
Specific points to note from the contractors point of view:
- if they are employees there is an â€śearned incomeâ€ť allowance on top of the personal allowance available
- self employed autonomos donâ€™t get the earned income allowance. They can deduct some expenses though to arrive at the net income chargeable to tax in the first place (see autonomo expenses guide)
- in terms of timing, the employee will pay a regular amount of income tax in the form of salary deductions. The autonomo pays a quarterly amount of advanced tax based on income less expenses (that is a big simplification â€“ see autonomo guide).
- If a contractor moves to Spain to start work during the year they get a full yearâ€™s tax allowances but are also liable to Spanish tax on their worldwide income for the full year. The exception is when they are taxed as non-resident despite living in Spain (see next section)
- If you have worked and earned in two or more countries during a single year, the tax calculation is bound to get somewhat complicated and you might want to email us explaining your circumstances for some guidance.
- Every year all tax payers with income over certain levels (see reporting thresholds) have to do a tax return, called in Spanish Declaracion de la Renta, covering all their tax affairs for the prior calendar year. If the tax liability calculated in the full return is higher or lower than the total tax actually paid during the year (as monthly salary deductions or as quarterly autonomo income tax) then another tax payment â€“ or alternatively a refund â€“ is due. This tax falls due in June or, by election, split between payments in June and in November.
6. Â Taxation of contractors â€“ strategies
As in any tax jurisdiction, there are sometimes choices and options that can be taken to minimise earnings from a contract. We have already discussed the employee vs self-employed choice which affects tax liabilities. There is also the question of tax residency.
On the surface, Spanish tax residency laws are very simple: anyone living in Spain for more than half a calendar year is deemed resident and liable to Spanish tax on their worldwide earnings for the year. But in practice it is more complicated, for example:
- in the year of arrival in Spain, when the contractor is moving countries, it can be difficult to pin down tax resident status. In marginal cases there may be scope for arranging things so that the tax payer avoids becoming resident and saves tax or vice versa â€“ deliberately ensuring they are tax resident in Spain and not their home country because that ensures a lower tax burden.
- â€śguest workersâ€ť in Spain have the possibility of applying to be taxed as non-resident for 5 years even though they are resident in practice. There are conditions and the Agencia Tributaria can refuse to grant the exemption from resident taxes. The advantage is that the foreigner granted this exemption pays tax at a flat rate of 24% on his Spanish income only thus not having to declare overseas income or pay higher rates of tax (residents pay up to 49%). The disadvantage is they get no tax allowances or deductions which can make it a bad choice for anyone not paying higher rate tax.
The other option to be considered for contract earnings is the use of a corporate structure either within or outside Spain to lower the tax burden. Within Spain for example the contractor would set up a Spanish limited company (sociedad limitada â€śSLâ€ť) to invoice the contract provider for their work. They would draw their earnings from the company as dividends or salary in the most tax-efficient way possible. Dividends are taxed from 20% to 24%; much lower than higher rate tax but of course there are expenses in setting up and running the company and corporate taxes to pay, at a minimum of 25% and rising for larger companies.
In practice setting up a company in Spain to funnel contract earnings will rarely pay. Setting up a foreign company in a low tax jurisdiction can have benefits but again there are administrative and setup costs and, in addition, tax avoidance legislation to be considered. But if there is a lucrative contract which is liable to generate more income than the contractor intends to spend, it may be feasible to allow the surplus to roll up abroad in a low tax environment (not necessarily a tax haven; some EU countries have very low rates of corporation tax).
If you have specific queries about issues raised in this article or would like to know more about Advocoâ€™s services, please email us here:Â contact us
There are more articles at the www.advoco.es/advice page. Use the dropdown box to see a list of articles under a topic.