One of the most common questions in the tax field is whether it is better to structure your activity as a professional (self-employed) or through a Private Limited Company (SL). As is often the case, there is no quick answer; it will depend on your specific situation.
Professional/sole trader
- The income obtained (revenue minus expenses) is taxed in your Personal Income Tax return (IRPF) as “Income from Economic Activities (RAE)” in the general tax base; the tax rate will depend on all income from employment, economic activities and real estate capital. The marginal rate can reach up to 50%.
- The Tax Agency allows you to deduct an “extra” 5% for hard-to-justify expenses.
- If you start a new activity, there is a 20% reduction on the net income obtained in the first year in which you generate profits and the following year.
- Checks and adjustments by the Tax Agency regarding the deductibility of expenses are frequent. The Tax Agency applies restrictive criteria in many areas when assessing deductible expenses for self-employed professionals.
Private limited company
- The income obtained (revenue minus expenses) is taxed under Corporate Income Tax (IS): the rate will be the reduced 15% in the first year in which you have a positive taxable base and the following year, unless you were already carrying out this activity as a professional; in those cases, the general rate between 21%/22% and 24% applies. However, if you then distribute profits as dividends, they are taxed between 19% and 30%, depending on the distributed amount, so accurate calculations are essential.
- Checks and adjustments by the Tax Agency on the deductibility of expenses are less frequent than for professionals, although you must still ensure that only expenses meeting the legal requirements are deducted.
- If in practice you are the one working for the company as a professional shareholder, you must be paid at least 75% of the profit before tax (“safe harbour”), so only the remaining 25% of the profit is taxed under Corporate Income Tax. However, in cases where the SL has no employees or real structure as a company, the Tax Agency may reassess and attribute 100% of the profit to the shareholder’s Personal Income Tax, where the tax burden is higher than under Corporate Income Tax.
- It involves more day-to-day work and costs, since you must keep formal accounts and file statutory books and annual accounts with the Commercial Registry.
In both cases, you must register as self-employed with Social Security (scheme RETA) and pay the corresponding monthly contributions. During the first 12 months, there is a flat rate of 80€ per month and, thereafter, contributions are usually between 300€ and 400€ per month, depending on your estimated net income. Finally, there is an important non-tax aspect: liability. For professionals, liability is personal, while in a company it falls on the company itself and, where applicable, on the director.
At GM Tax Consultancy, we recommend carrying out a detailed analysis of your specific situation, based on your expected level of income and expenses and the level of risk you are prepared to assume, before deciding which of the two structures may be more advantageous. We are available to discuss it with you whenever you wish.