Antonio Flores’ Blog

Setting up a Spanish Limited Company is a relatively straightforward process. In fact, many investors who are looking to start a business will immediately think of the colloquially known as “S.L. company”, formed via a notarial deed of company incorporation. And for many too, that’s about as knowledgeable as they get with these type of business structures.

Below is a list of “must knows” for any S.L. owner or director:

S.L.s are not devised for one-man bands: The Spanish Hacienda, whilst accepting that an S.L. is a legitimate form of conducting business, will not accept those that lack an infrastructure to carry out the commercial or professional activity -whether human or material resources (staff, office etc.)- e.g. people who work from home. These companies are described as “dummy” or “shell” companies and operating through them could be challenged by the Tax Office. This is the case too with services where the company could not exist without the founder: think of medical doctors, dentists, singers, elite sportsmen and women etc.

S.L.s cannot be “closed down”: I typically hear of people talk about closing a company down when debts become insurmountable. A company can only be closed if there are no debts; if there are, the director is obliged to file for bankruptcy within two months after it becomes insolvent, at the Courts.

High vs low share capital: Unless you are looking to show financial credibility with your potential clients or lenders, shareholders and directors should go for a lower share capital; the lower this figure is the less they will be personally responsible for. But this has downsides too: if a company has a net worth below 50% of the share capital, it is technically insolvent, being a legal ground for forcible wind up.

An S.L. is not a personal piggy bank: Company money and personal money are separate, no matter how much we try to try to stretch it; logic and common sense must prevail here. Here are some tips of what is deductible and what not: shopping list (if consumed by the business), clothes (only if they have a logo or anagram of the S.L.), vehicles and petrol linked to the S.L., business meals (up to 1% of the net income of the S.L.). Not deductible are holidays, new home kitchen, kids schools, etc.

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If I say that Spain is –undeniably- a country in love with bureaucracy, your response will be: “really…I don’t believe you for a minute?!” Sarcasm is rarely better suited to a statement that here.

Yes, unfortunately a good proportion (not all) of the 2.7 million Spanish civil servants need to move paperwork around to justify their jobs and that includes the Spanish “Hacienda”. However, these last ones seem to be getting better all the time and one example is the clampdown on tax loopholes on buying shares of a property owning company, even considering the exasperatingly confusing layers of new amendments.

Let’s take an example of article 108 of the Stock Exchange Act, a precept devised to prevent Spanish property buyers from using companies to circumvent the payment of transfer taxes. The wording of the article, modified at least 6 times since 1989, has given food for thought to judges, lawyers, tax advisors and notaries who, in very intellectually dense interpretations of what the lawman really meant to say, ended up more confused than before (getting many hundreds of property buyers into trouble in the way).

Simply put, this article regulated a general exemption of Spanish VAT, Transfer Tax and Stamp Duty for the transfer of securities of companies that held real estate assets. Back in the nineties, the article regulated on the scope of the exemption of payment of taxes if you bought property via the shares of a company and it talked about not acquiring more than 50% of the share capital of a company whose balance sheet was made up by, in at least 50% of it, Spanish real estate.

So many people, ensuring they bought equally with a partner of friend, got away with this and bought property free from transfer taxes, much to the despair of the Tax Office. In a new twist, the lawman introduced a new condition: that 3 years would have to pass between the time of transfer of the property into the company and the sale of shares (to avoid purpose-made company incorporations).

Not being enough, new amendments were introduced but primarily, they came up with one definitive concept: that it was presumed that if any of the above were met, one was trying prima facie to cheat the Spanish Hacienda.

And to close the loop, they introduced the final amendment whereby provided the property was being used for an economic or professional activity, transfer tax will be applied because it is presumed (subject to rebuttal) that one is trying to buy a home and pay no taxes (pretty practical here!).

In conclusion, a no-go area for potential tax-avoidance adventurers.

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