Interview with Javier Garcia
What is the name of your company and what services do you offer your clients?
Our law firm is called Sanchez Molina Abogados. The Sanchez Molinaís team comprises of nearly 50 people, 21 of whom are specialist lawyers, each one an expert in a particular branch of the law, complemented by a team of accountants and financial advisors, as well as a full back-up team of administrative staff.
If someone is thinking of setting up their own business, what is the first piece of advice you would give them?
Once the idea of the business is clear, the target we want to achieve in the short-mid term is a well defined plan and to ensure that there are enough resources to cope with the needs of the activity and not only to cover a few months or the initial investments (as we have to bear in mind that extra expenses will come up even with a well structured Business Plan). We then immediately explore all the possible ways to get the business underway through the different alternatives that we currently offer. As you all know, if the chosen way to run the business is not the appropriate one that will make it difficult for the business to grow and sometimes even jeopardize the interests of the business. In Spain a business can be run through several different methods but the most common ones would be setting up a Limited Liability Company (SL), a partnership or simply start trading as a freelance (individually).
Can you take us through the stages of setting up your own company and the costs involved?
In Spain, the most common Limited Liability Company is the SL (Sociedad Limitada). More than 95% of new companies created are SL instead of SA which used to be the main option until this new kind of Limited Liability Company was created in 1995. The process to set up an SL is not quick as there are some steps to be fulfilled until you are eventually granted the NIF (Identification number) by the Tax Authorities and you can therefore start trading.
The process would firstly comprise of reserving the name for the company that you want to set up at the Central Mercantile Registry located in Madrid. Once the name reservation is ready you have to open a bank account on behalf of the new company and put in the minimum sharing capital (for an SL that is currently 3,006 Euros). At that stage, once you have the name and bank certificate ready you have to prepare the articles of association of the company where you establish the management structure for the company, its managing director/s, the percentage of shares that will be owned by the shareholders, activity or activities of the company, etc. When the articles are ready, you need to sign them infront of a notary. Finally you need to apply for the NIF, communicate with the Tax Authorities and the Social Security and fully incorporate the company at the Mercantile Registry of the province (Barcelona for instance)
The costs involved vary depending on several factors as 1% of the share capital will be paid as incorporation taxes but reasonably the cost are around 1,350 Euros. That would include Notary fees, Mercantile Registry fees, incorporation taxes, VAT, Law firm fees and so on.
How does the process compare to other European countries?
The process in Spain is considerably slower compared to other countries like England where you can have access to Limited Liability Companies through the internet and start trading in one single day. Unfortunately, in Spain, it could easily be a month before the SL is fully incorporated. That doesn't mean you have to wait one month to start trading as before the full incorporation of the company you can start trading but if you want to be covered by the limited responsibility that will only happen with the full incorporation of the company.
What advantages and disadvantages are there being autonomo (freelance) as opposed to running a company here?
I'd summarise the advantages of being freelance as the following:
- When you want the lowest costs to run an activity.
- When it is unlikely that you will incur any liability or the responsibilities are not important.
- The accounting has fewer formalities to be fulfilled as itís simply a registry of invoices issued and received. No need for Bank reconciliation.
- No need to file and legalize the accounts at the Mercantile Registry.
- you can take advantage of some taxation regimes which are only applicable for freelances. The taxation regime of Modulosî for instance.
On the contrary the main disadvantages for being freelance would be:
- When dealing with third parties, it always provides a better image to be presented as a company and not just one person running a business.
- Unlimited responsibility if a problem arises and having to face it with your own assets - for example you could lose your house if you mismanage a situation and need to pay a tax bill.
- No possibility to check the accounts at the Mercantile Registry and show easily through an independent entity that a business is solvent in front of third parties.
- Income tax rate can reach the 43%.
Can you tell us how you go about becoming autonomo and the costs involved?
As I mentioned before, this is the easiest way to start a business as you just have to file two communications prior to starting the business.
The first one has to be filed at the Tax Authorities through the form 036. This is to acquire an activity code, (because every business has a code for the Tax Authorities), through this you also establish the Tax address from where you are going to be operating and the square meters that you are going to use. Through that form 036 you will also establish your obligations in terms of VAT and IRPF. In addition to this you also have to inform the Social Security in order to set up the Social Security account. You have 30 days after submitting the 036 tax form to the Tax Authorities to communicate with the Social Security in order to set up your social security contributions. This can cost from 250 Euros per month but could vary depending on the age of the individual or what you wish to cover yourself for.
What are the ongoing payments for being autonomo or a company?
The ongoing payments will vary depending on the obligations that you have established through the Tax form 036 (communication of the start of the activity) but mainly go from Social Security payments to VAT, Income Tax payments and/or Corporation tax Payments if you are running the business through a company.
Do these still have to be paid even when there is no income being received?
While the Social Security is a tax that has to be paid from day one whether as a freelancer or as a Director of your own company, the rest of the taxes will vary depending if they are voluntarily generated. For instance, if you have employees and therefore are paying salaries, Income tax would be then applicable. Same would happen if our company yields a profit, Corporation Tax would be then applicable also.
When does a company have to be VAT registered?
A company that has an activity that is not VAT exempt will have to be registered for VAT. By being registered for VAT, the company or individual has to increase their bills with a % for VAT (Value added Tax). In Spain, the general rate is 16% although there are reduced rates for different activities and rates can be then 7% and 4%. On the contrary, an activity that is VAT exempt like for instance the activity of a doctor wonít have to register for VAT as his/her activity is VAT exempt
What taxes need to be paid in Catalunya by a company?
The taxes for a company established in Catalunya do not differ to the ones paid by a company located in a different location in Spain. That would be the general rule not considering the Canary Islands that are granted a different Taxation Regime (more beneficial). In Catalunya a company will have to pay Social Security and depending on its activity and particular obligations the below:
Income Tax (that we call IRPF). This tax will be payable when amounts are withheld from employee payrolls.
Corporation Tax (Impuesto de Sociedades). This tax will be payable if the company yields a profit.
VAT (IVA). This tax will be payable when the company is subject to VAT and has to charge its clients VAT.
What taxes need to be paid in Catalunya by an "autonomo"?
The taxes to be paid will be similar to the company except the Corporation Tax.
Do you think it is an advantage or disadvantage being a woman running your own business?
From my point of view, I honestly think it makes no difference.
In your experience what are the main challenges facing expat businesses in Barcelona?
The main challenges that an expat faces in Barcelona are basically getting used to a completely different taxation regime. From the feedback I receive from all our expat clients, they are used to a more flexible taxation regime with less bureaucratic processes. That is also what makes their life very difficult in the early stages. But once the first quarter of activity has elapsed, and the new system gets more familiar to them I'd say they really realize that the business is located in a different country and therefore assume that there is no choice other than live with this new and sometimes complex taxation regime in order to get used to it as soon as possible and get the maximum benefits from it.
In your experience do expats have a different way of doing business to catalans?
There are not many important differences among the ways of doing business by expats or Catalans. At the end of the day the differences are minor. But to me one of the differences that I'd point out would be the way they use the Internet for their businesses. While a Catalan (in most cases) would simply have a website because they've been told to do so, but not really knowing what all the benefits they can get from it are and would simply use it as a business advert, on the contrary the expat not only has that website, it also makes it work. The difference on that aspect is huge and it doesnít seem to be changing for the short term.
From your experience what is the one bit of advice you would like to offer a woman thinking of setting up her own business in Catalunya?
Obviously, having an overall understanding of the Taxation system before you start raising your first invoices will provide more maneuverability to the business. But if I had to focus on a particular scenario, from a Taxation point of view, I'd advise them to be fully briefed about the Labour Taxation system and how the IRPF (Income Tax) and Social Security are calculated when having employees and the ways to minimize these taxes. Most of the time, when employing staff, the employer doesn't bear in mind the costs involved apart from the Net salary to be paid and then the tax load can be very high and even sometimes ruin the business from a cash flow perspective.
Javier Garcia, Lawyer and B.Sc in Business, Sanchez Molina Law Firm, Jan 2008
(+34) 934909669 javiergarcia@sanchezmolina.com www.sanchezmolina.com
