Limited companies in Spain have several legal options to reduce their tax burden. The following are some of the most effective strategies:
Taking advantage of tax deductions
Companies can benefit from several deductions to reduce corporate income tax:
- Deduction for research, development and technological innovation activities (R&D&I)
- Deduction for job creation
- Deductions for environmental conservation and improvement
- Deductions for investment in film productions and book publishing
It is essential to properly document all activities and investments eligible for these deductions.
Use capitalization and equalization reserves
These reserves are used to reduce the taxable income:
- The capitalization reserve allows a reduction of up to 10% of the taxable income if equity is increased and maintained for 5 years.
- The equalization reserve allows a reduction of up to 10% of the taxable income and a 5-year tax deferral for companies with a turnover of less than 10 million euros.
Taking advantage of the reduced rate for start-up companies
Newly created entities are taxed at a rate of 15% during the first two years with profits (with the exception of those that form a commercial group and patrimonial entities -those that do not carry out an economic activity-), instead of the standard 25% (as an exception, from 01-01-2023 the standard rate is 23% for companies whose turnover is less than 1 million euros, except for patrimonial entities that will continue to apply the 25% rate).
Plan deductible expenses
It is crucial to record and document all deductible expenses:
- Personnel expenses
- Office expenses and supplies
- Marketing and advertising expenses
- Professional training expenses
- Travel and subsistence expenses
A detailed record of these expenses should be kept to maximize deductions.
Consider changing to a Limited Liability Company
If you are currently self-employed and your income is substantial, changing to a limited liability company may offer tax advantages:
- They will go from paying progressive Personal Income Tax to a Corporate Income Tax with a fixed rate of 25% (with the exceptions already mentioned). It should be noted that entities providing professional services must distribute a minimum of 75% of the profit to the professional partner in order to avoid that the Treasury imputes 100% of such profit to the partner. This 75% is considered the “safe harbor”, although for entities that do not have their own structure and personal and material means, the Tax Authorities may be able to impute 100% of the profit to the partner.
- They will obtain greater legal protection by separating personal assets from business assets.
Allocate a strategic salary
As SL managers, assigning yourself a salary can be an effective strategy:
- Allows for a more efficient distribution of income.
- Part of the earnings will be considered salary, subject to personal income tax, instead of being subject to corporate income tax.
- To avoid problems with the tax authorities regarding the deductibility of the director’s remuneration expense, although there are discrepant criteria in this respect, it is advisable to approve such remuneration at a meeting and to establish in the Bylaws that the position of director is remunerated (and not free of charge).
Optimize the corporate structure
Entrepreneurs may consider creating a holding company and subsidiary structure:
- Holding companies in Spain can benefit from exemptions on dividends and capital gains. In particular the 95% exemption (general rule) on such income, as opposed to the taxation that would be applicable to individuals (much higher).
- They can distribute income and expenses among different entities to optimize the tax burden.
Seek professional advice
Given the complexity of tax legislation, professional advice is essential:
- A tax advisor can help identify all deductions and strategies applicable to the specific case.
- Keep updated on changes in legislation that may affect the company.
It is important to remember that these strategies must always be implemented within the legal framework and with proper advice. Tax planning is a powerful tool to optimize the tax burden of a limited liability company, but it must be done in a responsible and ethical manner.
