Do I need Spanish residency and when do I have to pay tax.

European Union

Citizens of a European Union Country are not required by law to hold a Spanish residency card. Practically however they will have to register for an NIE (Número de Identificación Extranjero) if they want a job contract, to incorporate a company, to own a car or to purchase a property.

It is also advantageous to hold a residency card to save carrying your passport around (it is a legal requirement to carry photo ID at all times), to get cheaper banking and mortgages, to pay by credit card and to get better terms from landlords.

An NIE takes approximately 4 weeks to obtain and is an official A4 document with an 8 or 9 digit number. A residency card takes 4 months and is credit card size with a photo.

Non EU

Non European Union citizens do need a residency permit to obtain a work contract in Spain . The application process is relatively complicated, long winded and more often than not results in rejection. They are however allowed to visit on a business or tourist visa for three months, extendable for up to an additional three months in any one year.

Non EU citizens can and will also need to apply for an NIE number if they want to own property, incorporate a company or own a car in Spain. The process takes approximately five weeks and can be done in Spain or in an embassy or consulate abroad. Given the time it takes, its best to plan and apply in your own country or organise with MHA when you first get to Spain.

Tax

You become a tax resident in Spain if you stay more than 183 days in any one calendar year and therefore you become liable for Spanish tax on your world wide income and assets, whether or not you hold a residency card or have a NIE number.

Even if you do not qualify under the above rule there may well be taxes due as a non tax resident, if you own a property, for example.

For a more in depth analysis of taxes in Spain see Martin Howard's Rough Guide on the subject or consult us for specific advice.

Setting up a business

The main types of business structures are the following:

Self employed (Autonomos) : Individuals need to register first with the Spanish tax authorities and then social security. Once registered, you will be obliged to pay a fixed social security charge per month. The minimum is just over €225 depending upon unemployment and pension benefits. Most self employed people have to file quarterly VAT returns and issue invoices with tax retention. Women and registered disable people amongst others are allowed a discount.

Limited Liability companies : There are various types, but the two most common are Sociedades Limitadas S.L. (equivalent to a British "Plc") and Sociedades Anominas S.A. ( equivalent Plc. or Inc.). An S.L. has a minimum paid up share capital requirement of € 3,006 and requires at least one shareholder and one director. An S.L. must present quarterly VAT declarations, annual accounts and corporation tax returns amongst its legal obligations. An S.A. has a higher minimum share capital of €60,000, to be paid up over five years with 25% paid up on incorporttion, it requires more than one shareholder and needs to present audited accounts.

Branch Office: A branch of an overseas company needs to be formed by a public deed and registered with the mercantile register and Spanish tax authorities in order to obtain its own CIF (Corporate tax registration number), have a permanent address and file similar returns as an S.L..

Self employed or S.L.

The answer depends upon the business. Being an autonomo is cheaper to set up, run and has fewer reporting and filing obligations however, the individual is personally liable for all obligations, debts and risks relating to his business activities. An S.L. is more flexible, limits the liability of the shareholders to the fully paid up share capital, but is more expensive to set up and run.

Therefore, if an individual will be working for themselves as a consultant, a teacher or a translator and will be working predominantly from home, with a low risk activity (i.e. risk from potential lawsuits) and with no employees, then autonomo status is normally the best option. For the rest, the advantages of flexibility and protection afforded by an S.L., outweigh the additional cost.

New incorporation or off the shelf

The incorporation process in Spain is complicated and long winded and takes over a month from the first decision to incorporate, to the date the company is fully registered in the company registry (Registro Mercantil). Off the shelf companies do exist but not really in the Anglo Saxon sense. An off the shelf company only really saves you time in the case of certain urgent transactions. The procedure of changing the name, articles, directors and activity still need to be signed before a notary and filed, so in effect you're paying twice or three times for the same thing.

A more efficient way, if you're pushed for time, because your time in Spain is limited, is to sign powers to a lawyer or accountant to carry out the incorporation on your behalf and even the subsequent transaction. However you must be sure that they are trust worthy.

In short ask for independent advice about the real need for an off the shelf company which should not come from the person trying to convince you to buy one.

Financing

Loans : banks in Spain are exceptionally risk adverse in that they will almost never lend money without a guarantee or a physical assets (i.e. property) to underwrite the loan. Once a company has been established for a number of years and has a trading history with the bank then they may offer more favorable terms such as an overdraft, leasing or a credit card without guarantees.

Grants : There are various institution in Spain , Catalunya and Barcelona offering different types of grant (subvención). New start ups in the technology sector, employment generating ventures and women entrepreneurs are the best served for subsidies.

Most grants however, subsidise the cost of borrowing, which means you must secure a commercial loan, under normal commercial conditions (see above), therefore if you don't have assets to secure the loan don't spend a lot of time apply for the grant and ask early on if this is the case of the grant.

There are other grants, which subsidise employment, notably Barcelona Activa, the application entails preparing a business plan in their format with a financial model. These subsidies may act as a double edged sword since you have to employ staff on permanent contracts and pay social security on those contracts for a period of time before complying with the terms of the subsidy and then wait six months to receive the money.

For further links go to the network section of this website.

Employing people

Each industrial sector is governed by its own set of rules issued annually between the unions and government, called the Convenio. The Convenio sets out the rules regarding hours worked, holidays, redundancy compensation, working conditions and minimum wages. Thus the rules relating to any individual employment question will vary with each circumstance.

The summary set out below is for guidance since these general principals may not apply in your case. However for office workers they are typically.

Contracts

There are three principle types of contract:

3 month temporary

6 month temporary

Indefinite

• Up to two temporary contracts can be issued to an employee for up to six months although in practice it may be done for up to nine months i.e a 3 mth + 6 mth or 6mth + 3 mth or 3mth + 3mth.
• If a temporary contract is not renewed, rescinded or terminated within 5 days of its expiry date it can automatically become an indefinite contract.
• Employees contracts must first be registered with the social security upon the presentation of an identity document plus an NIE number. The NIE is the tax registration number of the employee and in recent times the authorities have become very strict, and may not issue a contract without one.
• 4 copies of the contract then need to be signed by both the employee and employer's representative, these are then returned to INEM (The department of employment) to be officially registered and a copy is returned to the employee and a photocopy retained by the employer.

A last type of contract, common in language schools, is a fixed period contract for a definitive period of time. It acts like a temporary contract in that, at the end of its term, the employer does not have to pay compensation.

Employees rights

Full time employees generally have the following principle rights:

A formal contract stipulating the hours they are to work and a remuneration at or above the minimum wage for the sector.

• Two rest days per week.
• Two days paid holiday for every month worked. An employee becomes entiltled to a whole month of holidays if they have worked for six months or more.
• An additional paid day off for every public holiday worked.

Dismissal

An employee may typically be dismissed in the following ways

• First month of work: without notice with unused holidays paid as severance (a finiquito).
• End of first temporary contract: without notice with unused holidays paid as a finiquito.
• End of second temporary contract: with 15 days notice and unused holidays paid as a finiquito.
• Justified dismissal: three written warnings for serious breach of employment contract and unused holidays paid as a finiquito, no further indemnity is payable. What constitutes a serious breach depends upon the convenio in each sector but examples include abusive behaviour, consistent lateness or failure to turn up to work.
• Unjustified dismissal with notice: One month's paid notice followed by a finiquito for unused holidays and 45 days for every year worked prorated.
• Unjustified dismissal without notice: i.e. no notice or warning given, one month's salary, unused holidays and 45 days pay for every year worked (this changes as per each convenio).

If an employee leaves on their own accord they have the right to be paid for unused holidays and cannot claim compensation.

In all cases the law is very procedural and you should always consult with MHA if in doubt. Since a failure by an employer to follow the correct procedure will count against them no matter what the employee has done. An example would be an employee not turning up for work. If the employer does not register this behaviour by registered mail (burofax) within a week the employee may claim he's was verbally dismissed, take his employer to tribunal and most probably win his compensation claim.

Labour tribunals seem to frequently decide in favour of the employee and an adverse judgement can result in heavy fines and compensation payments, so it is best to avoid them.

Employing people without a contract, and worse still, without residency papers can result in additional fines and back dated social security dues. If in doubt, don't do it, you'll nearly always come off worse.

Cost

Social security and tax costs are high in Spain even if the actual wages paid are comparatively low. As a rough guide add 40% to 50%, on top of the net salasy received by your employee, to calculate the cost to the business.

Social security is paid at the end of the following month of employment and withheld income tax (IRPF) on 20 th of the month, after the end of the calendar quarter.

There are ways to reduce the cost, for example a permanent contract is subject to less employers social security then a temporary contract but it is also more costly to terminate. Employing a person previously registered as unemployed also reduces the social security cost. It is best to seek professional advice to look at ways to reduce to a minimum the cost of your employees.

Terminology

Net Salary: remuneration paid to the employee after the deduction by the employer of both tax and social security dues.

Gross Salary: remuneration before deduction of tax and social security contributions.

Cost to employer: the employees gross salary plus employers social security contribution.

Convenio: nationally agreed employment rules per economic sector.

Finiquito: final payment to an employee on termination of their contract, resignation or dismissal.

Nomina: monthly pay and payslip.

TC1 & TC2: Social security and analysis.

Hacienda: Spanish tex authorities

Ayuntamiento: Local town council

Generalitat: Regional council