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The Spanish SL vs. U.S. LLCs from a tax point of view

Different possibilities in the format of economic activities in Spain and the US for residents in Spain.

In Spain

In Spain an individual can develop an economic activity as self-employed (autónomo). Autónomos must register in the Social Security and must fulfill their tax obligations.

The most common form of a Spanish company is (2) the SL Sociedad Limitada, the shareholders can be individuals or other companies (Spanish or foreign), and the company has different legal personality from its shareholders. The SL is obliged to fulfill its tax obligations and it is mandatory to have an Administrator who is obliged to contribute to the Social Security, as “Autónomo Societario”, around €370 per month, and in no case, they have the bonus of the rest of the “autónomos”.

From the fiscal point of view:

  1. “Autonomos” pay their taxes annually on the Tax Return, Modelo 100 IRPF (Impuesto sobre la Renta de las Personas Físicas), like any other resident in Spain, same as individuals with “impuatción de rentas”.

General tax rate plus Madrid tax rate 2020 (Earned income):

Base amount up to euros Tax in € Rest of base amount up to euros % aplicable
–   € –   € 24.900,00 € 18,50 %
24.900,00 € 2.303,25 € 13.007,20 € 23,20 %
37.907,20 € 3.822,06 € 30.300,00 € 28,30 %
68.207,20 € 8.106,96 € 45.200,00 € 36,40 %
113.407,20 € 16.346,56 € Onwards 43,50 %

General tax rate on savings plus Madrid tax rate on savings 2020 (Interest, Dividends and Capital Gains):

Base amount up to euros Tax in € Rest of base amount up to euros % aplicable
–       € – € 6.000 € 19%
6.000,00 € 570 € 44.000 € 21%
50.000,00 € 5.190 € Onwards 23%
  1. SLs pay taxes annually with Modelo 200 IS (Impuesto de Sociedades)

General tax rate is: 25%. Reduced tax rate 15% for entrepreneurs.

In the U.S.A.

The individuals/entities in the US can be classified in (3) persons with economic activity (= self-employed) sole proprietorships and (4) Limited Liability Corporations (LLC): For tax purposes, a LLC can be a considered a sole proprietorship, a partnership, a S-Corporation or a C-corporation – depending on how many owners the LLC has, or how the business owner elects to tax the LLC. Owners of an LLC are called members. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs, and foreign entities.

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, “Sole proprietorship”; a LLC with at least two members is classified as a Partnership. Unless it files Form 8832 electing to be treated as a corporation.

The main advantage of having an LLC taxed as a corporation is the benefit to the owner of not having to take all of the business income on taxpayer/owner  personal tax return. Taxpayer/owner also does not have to pay self-employment tax on his/her income as an owner from the corporation. he can pay taxes only on thje dividnds distribution. So, the main disadventage is the double taxation: taxation on the corporate income and taxation on the distributions.

From the fiscal point of view:

  1. The current self-employment tax rate is 15.3% (2021) and there is a Totalization Agreement between both Social Securities, so if you are fiscal residents of Spain and you pay the “Autonomos”, you do not need to pay self-employment tax in the US. Sole proprietors are responsible for reporting the balance on their own return. If the individual is fiscal resident of Spain, s/he must pay taxes in Spain first as “imputación de rentas”.
  2. LLCs treated as corporations might pay State Taxes and, for tax purposes we have S-corporations and C-corporations.

Partnership LLC

If the LLC is a Partnership, it should file a Form 1065, U.S. Return of Partnership Income. Each owner should show their pro-rata share of partnership income, credits, and deductions on Schedule K-1 (1065), Partner’s Share of Income, Deductions, Credits, etc. Generally, members of LLCs filing Partnership Returns pay self-employment tax on their share of partnership earnings. If partners are fiscal residents in Spain, they must pay taxes in Spain first as “imputación de rentas”.

Eligibility of a S-Corp

S-Corporations do not pay corporate income tax. Instead, the corporation’s profits pass through to the shareholder’s personal tax returns, and each shareholder pays personal income tax on his or her portion. For this reason, S corporations are known as “pass-through entities.”

To qualify for S corporation status, the corporation must meet the following requirements: Be a domestic corporation, no more than 100 shareholders, have only allowable shareholders: may be individuals, certain trusts, and estates and may not be partnerships, corporations, or non-resident alien shareholders and there can only be one class of stock.

(the S Corp pays payroll taxes for owners who perform services for the S Corp). The self-employment income tax rate is (15.3%) 12.4% for Social Security and 2.9% for Medicare. Any income an LLC generates is considered taxable income. If owners are fiscal residents of Spain, they might have to pay first taxes in Spain as “imputación de rentas”.

Eligibility of a C-Corp

C-Corporations file a corporate tax return Form 1120 and pay corporate income tax on the company’s profit, right now is 21% over the benefits, but it is possible that it will increase up to 28% in the future. If the corporation distributes some or all the profit to shareholders, the shareholders pay personal income tax on those distributions.

Because distributions are taxed at both the corporate and the shareholder level, C-Corps and their shareholders often end up paying more in taxes than S-Corp or other LLCs.

Form 1120F

This form is used by foreign corporations that maintains an office or place of business in the United States; they can also pay employment tax to employees 941 (quarterly) and produce K1 to stakeholders.

Other considerations of LLCs vs Autónomos/SL

Pass-through taxation for Sole Proprietorship -sole proprietorships are not pass-through entities, it’s just a fancy way to say you do business without any legal entity- Partnerships, and S-Corps where profits are passed along to its members who are then responsible for reporting the income on their personal tax returns. Sole Proprietorship do not pay federal business tax, and there is no business tax in most states. Remember that if partners or sole proprietorships are fiscal residents in Spain, they must pay taxes in Spain first as “imputación de rentas”.

LLCs are more informal when compared to a corporation that must designate a board of directors and shareholders who are legally responsible. This might be a potential downside with LLCs: It can be harder to obtain credit, raise capital, and determine the value of the LLC business when compared to a corporation. A bank is likely to look at how the business is structured and the method for distributing profits and contributions to the owners. With a corporation, the risk is spread out among shareholders which could lead the bank to determine a corporation is less risky versus a single owner LLC.

If you determine you want a LLC:

Keep in mind that if you are fiscal resident of Spain (1) you will always have to pay taxes from your business in the US, in your IRPF, unless you incorporate a C-corp, which will pay taxes only in the US and you will have to pay taxes in Spain over your earned income and/or the dividends paid by your C-Corp.

(1) you also must decide what state will be the home base for your business. For most people, this is an easy decision as they want the company to register where they are doing business. Other people prefer to file in a different state, like Delaware, even if they are not based there. Delaware is the state of choice for many investors. While the process is a little more expensive as you need someone to act as your local registered agent, it can be an important choice if you plan to raise capital for your business.

(2) It is also important to point out if you form your LLC in one state and plan to do business in another state, you will need to register in other ones where you do business, which will increase your startup costs. You might have to pay Sales Tax.

(3) if you choose to have a Disregard Entity, a Partnership or a S-Corp and you are fiscal resident of Spain, you must pay taxes in Spain first as “imputación de rentas”, if you choose a C-corp keep in mind that the funds received from the entity must be reported in both countries as dividends or earned income.

(4) invoices to and from an individual/entity in the US should not include Spanish 21% VAT but must be reported Individual Tax Return annually in both countries.

(5) If you are not contracted directly by an entity, you must pay in Spain the Special Regime for Autónomos to the Social Security.

 

Please, also read Self-Employed or Limited Liability Company in Spain? – US Tax Consultants

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