While planning a business expansion, everybody dreams of making it a multi-million-dollar company with its presence in every growing market in the global landscape. Spain is one such country with great prospects for any foreign company to grow and flourish in its market. But while planning the expansion, it is also necessary to consider the payroll taxes applicable in Spain.
So, if you are planning to expand your business activities into the Spanish market, you must get well versed with the payroll tax basics in Spain.
Also Read: GLOBAL EMPLOYER OF RECORD
But before we jump into our main discussion, let us quickly revise the basic concepts of payroll taxes in general. Here is a brief explanation -
What is Payroll Tax?
Payroll tax is a taxation category levied on an employee’s compensation by their employer paid to the government on the employee’s behalf. Payroll tax is usually calculated on the employee’s wages, salary, and other tips paid to them, while the federal payroll taxes are directly deducted from their earnings.
Talking about the payroll tax categories employers need to know about, there are four major classes to discuss. It includes income tax, social security taxes, value-added tax (VAT), and corporate tax. These are explained below -
Income tax
If we talk about the fundamental meaning of income tax, it refers to the classification of taxes that governments levy on the income businesses and individuals generate within the government’s jurisdiction area. In Spain, the existing corporate income tax rate stands at 25%. Usually, it is calculated on a progressive scale ranging between 19% to 45%. However, it depends on the taxpayer’s annual income and the autonomous region where they live.
The existing income tax brackets for state and Federal rates in Spain are as follows -
- 19% for €0 – €12,450
- 24% for €12,451 – €20,200
- 30% for €20,201 – €35,200
- 37% for €35,201 – €60,000
- 45% for €60,001 – €300,000
- 47% for More than €300,000
A few other essential points to note here concerning income tax are -
Corporate Income tax also depends on the type of company and its nature of business.
For newly established companies, the tax rate stands at 15% for both the first tax period and the period following it.
The above category does not apply to equity companies or other newly established corporations that are already a part of any other national or international Alliance.
Social security taxes
Also known as social security contributions, social security taxes are paid on an employee's salaries and wages. According to the general rules, the minimum monthly base for social security contributions stands at EUR 1,125.90 for the minimum and EUR 4,139.40 for the maximum in 2022.
On the other hand, the social security contributions rate stands at 6.25 for employees. It depends on the type of employment contract. The same rate stands at 29.9 0 for employers, including the coverage for occupational categories that accounted for 1.5 % of the office work. Therefore, any foreign company must take care of the social security taxes if it is looking forward to expanding its business in Spain.
In addition to this, individuals belonging to the following categories may be exempt from paying social security contributions -
- A social security agreement is enforceable between the Spanish Government and the employee’s home country.
- An employment relationship exists between the employer's home country and the employee continues to pay social security contributions to their home country’s social security system.
- The employee’s stay in Spain is no longer than 5 years depending on the social security agreement between their home country and Spain.
Value-added tax (VAT)
Value-added taxes in Spain remain payable on the supply of goods and services circulating within the government territory. The category also includes imports and other purchases of goods and services eligible for it. Value-added taxes are calculated within 3 rate categories depending on the types of goods and services. These include -
- 21% rate applicable on regular and permitted supply of goods and services.
- A lowered rate of 10% applies to basic necessities, including food and agricultural products. These products must not be included in the super-reduced 4% rate category and other similar qualifying services. The category also includes live cultural events, including cinema and theatre tickets taxable at 10%.
- 4% rate applicable on basic necessities other than the goods and services included under the reduced rate category of 10%.
It must also be noted that a few rules apply differently in regions such as the Canary Islands. A different tax category is applied in place of value-added tax, known as the Canary Islands general indirect tax. It is charged at 7% for ordinary categories. This tax category is similar to the regular value-added taxes despite several differences including an exemption for telecommunication services.
Corporate tax
The regular corporate income tax for corporate entities in Spain stands at 25%. Other tax rates are applicable depending on the type of company and the nature of the business. However, it is necessary to know that local companies have to pay corporate income tax on their global income.
Non-resident income tax is levied on income that can be allocated to the 25% tax rate category in the case of foreign companies. However, non-resident income tax is also chargeable to non-established foreign companies and individuals that generate income in Spain. Thus, the set of rules is different for local companies and foreign companies.
Final words
Concerning our discussion in the above sections, it is clear that the payroll taxation structure in Spain is quite simple to understand and hassle-free. While the rules for domestic and foreign companies differ in a few categories, the remaining rules and regulations are easy to implement. However, for a foreign company planning its expansion here, getting assistance from a Payroll and Employer of Record in Spain can help a lot through the process. It reduces the burden significantly and helps the company establish its international presence in the Spanish market in a hassle-free manner!
