Do you reside in Spain but own or hold shares in a foreign company? If so, it is essential that you understand the tax implications involved. The Spanish legal and tax framework is quite strict regarding income or assets received from operations outside the country. In the following post, we will explain everything clearly so you understand the tax implications of your situation.
The Spanish tax system: A brief walkthrough
According to Spanish legislation, tax residents in Spain must declare their worldwide income. This includes dividends from abroad, which are subject to the “dividend tax Spain” and the savings income tax. Ignoring these implications can result in double taxation or conflicts with the Spanish Tax Agency (Hacienda). The tax system is structured around a combination of direct and indirect taxes that affect both residents and non-residents. The most important taxes for foreign investors and entrepreneurs are:
- Non-Resident Income Tax (IRNR): Applies to non-residents who generate income in Spain. For example, it taxes rentals, dividends, interest, or capital gains.
- Personal Income Tax (IRPF): For tax residents, this tax covers all their income, including that obtained abroad.
- Corporate Tax: Companies resident in Spain are taxed on their profits at the general rate of 25%.
- Capital Gains Tax: Both residents and non-residents must pay this tax when selling an asset (shares, real estate, etc.).
Foreign companies and their classification
Now let’s look at it from the perspective of where the company operates. The tax authorities classify these entities into three main categories:
Totally foreign companies
These are companies incorporated and managed entirely outside Spain, with no physical presence or direct economic activity in the country. If such a company generates income from Spain (for example, by renting out property or selling assets), it is subject to the non-resident tax in Spain and may be required to pay capital gains tax if it sells assets located in Spanish territory.
Domestic foreign companies
These are entities incorporated outside Spain but with a permanent establishment or central administration in Spanish territory. For tax purposes, they are considered tax residents and must comply fully with the Spanish tax system.
Mixed companies
These are companies that, although registered abroad, carry out part of their activity in Spain or through Spanish subsidiaries and are usually subject to double taxation.
Key tax obligations for foreign companies in Spain
Foreign companies operating wholly or partly in Spain, whether through subsidiaries, branches, or local contracts, must comply with the following tax and administrative obligations to avoid penalties and operate legally:
Declaration of income tax
Non-resident companies without a permanent establishment are taxed under the Non-Resident Income Tax (IRNR). The standard rate is 24% on gross income, although it is reduced to 19% for residents of EU or EEA countries.
Filing VAT returns
If a foreign company carries out commercial operations subject to VAT (such as selling products or providing services in Spain), it must register as a VAT taxpayer. This involves issuing invoices with Spanish VAT, declaring the tax, and submitting the corresponding forms, generally on a quarterly basis.
Managing social security payments
Finally, if a foreign company hires employees in Spain, it is required to register them with the Spanish Social Security system, make monthly contributions, and comply with local labor regulations. This applies even to companies without a physical presence in Spain but with employees working from the country.
Practical guide to invoicing foreign clients as a resident of Spain
So, what happens if you reside in Spain but provide services to clients outside the country, either as a freelancer or a company? In this case, you need to know how to issue invoices correctly. For example, if the client is outside the European Union, the invoice is usually issued without VAT, indicating the exemption according to Article 69 of the VAT Law. For clients within the EU, both parties must be registered in the Register of Intra-Community Operators (ROI) to apply the reverse charge mechanism (0% VAT). You may invoice in the client’s currency (USD, GBP, etc.), but it is advisable to also include the equivalent amount in euros.
Tax returns for expatriate freelancers working with international clients
Freelancers or self-employed individuals residing in Spain who work with international clients must submit several periodic tax returns, whether they work for foreign companies or invoice individuals outside the country. These include:
Quarterly IRPF tax returns
As a freelancer, you are required to submit form 130 (direct estimation) or form 131 (objective estimation) each quarter, depending on your tax regime. This involves an advance payment of 20% of net profit (income minus deductible expenses) as part of the IRPF.
Quarterly VAT tax returns
Even if you invoice abroad and many operations are exempt, you must still submit form 303 (quarterly VAT return). If you have issued invoices without VAT, you must still declare them as exempt operations. In parallel, you must submit form 349 to report intra-community operations.
The annual tax return process
Finally, at the end of the year, you are required to submit the annual income tax return (form 100), including all income, deductions, and advance payments made during the fiscal year. You must also submit form 390, an annual VAT summary, which is currently being replaced by the Immediate Supply of Information (SII) system for some freelancers.
Conclusions: The importance of keeping up-to-date with tax laws
In conclusion, owning or managing a foreign company while residing in Spain entails a tax responsibility that cannot be taken lightly. You must engage in tax planning, make decisions based on up-to-date information, and, if possible, seek professional advice on the matter.
