The 10 strategies in a table
| Strategy | Estimated savings | Ideal profile |
|---|---|---|
| Foreign LLC (non-effective resident) | Up to 25% | Digital nomad |
| Self-employed IRPF deductions | 10% to 35% | Resident self-employed worker |
| Micro-S.L. (19% Corporate Tax) | 18-28 points vs IRPF | Self-employed >€40,000/year |
| Corporate pension plan | Up to 47% on contribution | Self-employed and S.L. partner |
| Change of tax residency | 20% to 47% | With real mobility |
| Beckham Law (inpatriates) | Fixed 24% vs up to 47% | New resident |
| Family holding | 95% dividend exemption | Business owner with multiple subsidiaries |
Strategy 1: LLC in Delaware or New Mexico
The partner must not be a tax resident in Spain (more than 183 days a year). If they reside in Spain, the LLC is taxed under IRPF all the same.
See: what an LLC is • how to create it from Spain
Strategy 2: Maximize IRPF deductions as a self-employed worker
With income of €60,000 and well-documented expenses, the tax base can be reduced between €10,000 and €20,000: saving €3,700 to €9,400 in IRPF.
Strategy 3: Establish a micro-S.L.
The 18-28 point differential on profits left in the company can mean savings of up to €28,000 on €100,000 of profit. Requirement: the S.L. must have real economic activity, not just manage passive assets.
Strategy 4: Individual and corporate pension plans
A person with a 47% marginal tax bracket who contributes €10,000 annually saves €4,700 in IRPF that year.
Strategy 5: Change of tax residency
The non-resident income tax (IRNR) for income from activities without a permanent establishment is 19-24%, compared to up to 47% for IRPF. Potential savings: 23-28 percentage points on high incomes.
IMPORTANT: the change must be real, not simulated. Spain applies a Exit Tax of 5 years for latent capital gains on shares if the stake exceeds 25% or the value exceeds 4 million euros.
Strategy 6: Inpatriate Regime (Beckham Law)
On €300,000 of income, savings can exceed €69,000 per year. Requirement: not having been a resident in Spain in the previous 5 years. Application deadline: 6 months from the start of activity.
How to choose the right strategy for your profile
No single strategy works the same for everyone. The choice depends on 3 variables: whether you are a tax resident in Spain, whether you operate as an individual or legal entity, and whether you have real geographic mobility.
- Resident self-employed with low-medium income (<€60,000): maximize IRPF deductions + maximum pension plan
- Resident self-employed with high income (>€60,000): study setting up an S.L., R&D deductions if you innovate, holding structure
- Digital nomad without fixed residency in Spain: LLC in Delaware or New Mexico when actual management is from abroad
- Foreign professional arriving in Spain: apply for the Inpatriate Regime in the first 6 months, no exceptions
Legal notice: This article is for informational purposes and does not constitute personalized tax advice. Consult with a tax advisor or licensed tax attorney before making decisions.
The Tax Avoidance in Spain plays an important role; taxes, which at one time were considered a contribution to the population's welfare, have lost their original purpose due to the embezzlement of public funds and inefficient management. This has transformed Spain into a veritable tax hell, with one of the worst tax systems worldwide.
This is why many wonder «What is Tax Avoidance» and how I can learn to optimize my taxes in Spain. In this article, we will explore in depth the concept of tax avoidance, its legal implications, and its practical application in various scenarios. As we delve into this topic, you will discover how you can strategically leverage this financial tool to legally reduce your tax burden.
What is Tax Avoidance?
The tax avoidance refers to the use of financial and legal strategies to minimize the amount of taxes an entity or individual must pay. Unlike tax evasion, which is illegal and consists of concealing income or falsifying information on tax returns, tax avoidance is based on making the most of legal loopholes and tax incentives to reduce the tax burden.
What is Tax Evasion?
The tax evasion in Spain refers to the act of illegally avoiding the payment of taxes; concealing income, manipulating accounting records, operating with cash, fake invoices, etc..
Tax Evasion vs Tax Avoidance
The tax avoidance is legal and consists of taking advantage of loopholes and tax benefits. The tax evasion is illegal and refers to concealing income or providing false information.
Examples of Tax Evasion
In Spain tax avoidance is very common, below I will give some examples;
Use of Cash: Sectors such as hair salons, restaurants, and nightclubs often operate primarily in cash, which makes income traceability difficult and facilitates underreporting.
Fake Invoices: Some individuals offer the issuance of fake invoices to small businesses. These fictitious invoices can inflate expenses, artificially reducing income and, therefore, lowering the taxable base for taxes.
Unreported Income: By not declaring all income obtained, whether through cash transactions or other means, the taxable base and, consequently, the amount of taxes to be paid are reduced.
Profit Shifting: Large companies sometimes transfer profits to countries with lower tax rates, thereby reducing the amount of taxes they must pay in Spain. (*Done correctly it can be avoidance and not evasion)
Use of Tax Havens: The investment and transfer of funds to tax havens is also used to reduce the tax burden by benefiting from lower or non-existent tax rates. (*Done correctly it can be avoidance and not evasion)
Transfer Pricing Manipulation: Companies can manipulate prices in transactions between subsidiaries to artificially move profits to jurisdictions with lower tax rates.
- Refunds: By requesting a refund for a product or service while already having the invoice, you can choose another payment method and still deduct the invoice.
Examples of Legal Tax Avoidance
The tax avoidance in Spain offers various options to legally reduce taxes. It is essential to get advice before taking action. At EluTax, we provide support for Tax Optimization Secure.
Deductible Expenses: Increasing expenses implies reducing profits and, consequently, Profit Taxes (Personal Income Tax or Corporate Tax). Conducting a strategic analysis of deductible expenses can be beneficial.
Company vs Self-Employed: Evaluate your business volume and the nature of your activity to determine which structure is most beneficial. We will dive deeper later.
Foreign Companies: Few people know about LLCs or OÜs, foreign companies that can be created without residing in those countries. Examples:
- LLC in the United States: Ideal for online businesses. Advantages: ease of creation, low maintenance costs, tax benefits, anonymity.
Specialized Tax Advisor: Tax Engineering is key to reducing taxes. Consulting an Advisor Specialized in Tax Avoidance is effective for obtaining secure results.
Self-employed by modules: The objective estimation regime is suitable for simplifying taxation in specific sectors.
It is crucial to keep in mind that avoidance strategies must comply with the law. Consulting experts in tax and legal consulting guarantees the correct and safe implementation of these practices.
Deductible investments
- Deductions for investments and expenses of cultural interest
- Investments in newly created companies
- Investment in BME Growth companies
- Deduction for investments in live shows
- Pension plans
- Investments in physical gold
- Real estate for rent
How Does Tax Avoidance Work?
The legal tax avoidance implies a careful and strategic planning of finances to maximize the tax benefits permitted by law. This may involve investments in specific financial instruments, structuring of commercial transactions, taking advantage of y deductions available tax credits, knowledge of the laws of the tax system, etc… In essence, tax avoidance seeks to optimize the financial situation so that taxes are minimized legally.
How to pay less taxes legally
There are many options for legal tax avoidance in Spain, it is important to get advice before taking any action. At EluTax we can give you the support to do Secure Tax Optimization. Below we show you some tax strategies to reduce taxes.
1. Deductible Expenses:
Increasing expenses implies decreasing profits, which results in a reduction of Profit Taxes (Personal Income Tax or Corporate Tax). Carry out a strategic analysis of the expenses you can deduct in your activity and benefit from it.
Examples of deductible expenses:
- Office and Local Expenses (rent, utilities, furniture, renovations, mortgage).
- Working Material (tools, computer equipment, software).
- Transportation Expenses (fuel, vehicle maintenance).
- Communication Expenses (telephone, mobile, postal mail).
- Advertising and Marketing (promotion, online advertising).
- Training and Professional Update (courses, seminars).
- Insurance (civil liability, health, accidents).
- Bank Fees (commissions, financial management).
- Professional Fees (lawyers, accountants, advisors).
- Self-Employed Contributions (Social Security).
- Clothing and Footwear (Safety shoes, gloves, caps..)
- Family (Daycare, rent, large family or disability, domestic help, school..)
2. Company vs Self-Employed
The comparison of taxes of a company and a self-employed workerin Spain can vary depending on various factors; income, expenses, business structure, location, and the nature of the activity. Below I show you an overview of how taxes could differ for both options:
Freelance:
Personal Income Tax (IRPF): Self-employed workers are taxed based on their personal income. Tax rates vary according to income brackets and province.
- From €0 to €12,450: 19%.
- From €12,450 to €20,200: 24%.
- From €20,200 to €35,200: 30%.
- From €35,200 to €60,000: 37%.
- From €60,000 to €300,000: 45%.
- More than €300,000: 47%.
Self-Employed Fee: It is paid monthly to Social Security and varies depending on the chosen contribution base.
- Year 2023:minimum fee of 230 eurosandmaximum of 500 euros*.
VAT: Self-employed workers must collect and pay Value Added Tax (VAT) on their products or services. They can deduct the VAT paid on their purchases.
- General VAT – 21%
- Reduced VAT – 10%
- Super-reduced VAT – 4%
Corporation (Limited Liability Company – SL):
Corporate Tax: Corporations are taxed on their profits at a flat rate, which may be lower than the marginal IRPF rates. (25%)
Remuneration to Partners or Dividends: If partners receive remuneration, they are also subject to personal IRPF.
VAT: Just like in the case of the self-employed, the corporation collects and pays VAT for its operations.
In general, corporations can have advantages in terms of tax planning, since they can apply strategies of broader expense deduction and separate personal taxes from business taxes. However, they also entail additional administrative costs and more complex accounting requirements. There must also be an administrator in the company who must be self-employed worker if they hold more than 25% of the shares.
3. Foreign companies
Not many people know the terms LLC or OÜ, they are companies outside of Spain that can be created while being a Spanish Resident without stepping foot in those countries. Below it tells you all about each one.
LLC in the United States
An LLC in the United States is a Limited Liability Company that can be created online without being a US resident. LLCs are ideal for online service businesses or the sale of digital products. Some of the advantages of operating a US LLC from Spain are:
- Ease of creation: With EluTax we create your LLC in 7 days with EIN included
- Low Maintenance Costs: For less than €500 a year you can keep your LLC up to date with state fees, taxes, etc.
- Tax Benefits: LLCs are pass-through entities, if you don't sell in the USA you don't pay taxes. The earnings of the LLC are taxed on your income tax return in Spain.
- Anonymity: In some US states, information about LLC members is kept private.
- Simplified Tax Filing: LLCs only have to file taxes once a year
- Limited Liability: Just like with other limited liability companies
- Bank Account Flexibility: You can open bank accounts and use payment gateways in the United States
- No need to be Self-Employed: Unlike many companies in Spain, it is not mandatory to be self-employed
Before creating any company abroad it is important to get advice, in case of not having a valid economic motiveto operate your business from abroad you will have problems with your local tax office.
4. Tax Advisor Specialized in Tax Engineering
If you are not familiar with Tax Engineering nor do you understand your country's tax system, the most effective option to reduce taxes is to consult with an Advisor Specialized in Tax Avoidance.
It is important to keep in mind that many agencies and advisors in Spain follow traditionalapproaches, and the mention of "tax avoidance" could generate certain apprehensions. For this reason, I advise you to invest time in searching for a suitable advisor or manager, and verify their experience in the field.
5. Module-based Self-Employed (Autónomo por módulos)
The objective estimation regime, also known as the module system, is aimed at self-employed workers who want to simplify their taxation. This system is especially suitable for certain economic sectors and activities with specific characteristics. Among the self-employed who can opt for this regime are:
Who Can Be a Module-Based Self-Employed Worker?
- Agricultural, livestock, and forestry activities.
- Sectors that operate with private clients, such as restaurants, hair salons, and retail stores.
- Other activities specified by the Ministry of Finance.
Requirements to be a Module-Based Self-Employed Worker
To access the module regime, it is necessary to meet certain requirements:
Billing Volume: The annual volume of gross income (income without deducting expenses) must not exceed certain limits, which vary depending on the activity:
- Agricultural, livestock or forestry activities: €250,000
- Other activities (2022 and 2023): €125,000
- Operations with invoicing (2022 and 2023): €125,000
Compliance with Conditions: In addition to the billing limits, other conditions must be met:
- The activity must be included in the order of the Ministry of Finance.
- The volume of purchases must not exceed €250,000 (excluding VAT and fixed asset purchases) in the previous year.
- Not carrying out the activity outside the scope of application of the Personal Income Tax (IRPF) in Spain.
- Not being excluded from the simplified VAT regime nor the IGIC (Canarian VAT).
- Not having another activity under the direct estimation regime.
Benefits of the Modules Regime
The module system offers various benefits that can result in tax savings and administrative simplification:
- Objective Estimation: The calculation is based on pre-established objective parameters, avoiding the need to keep a detailed record of income and expenses.
- Fixed Deductions: There are fixed deductions depending on the activity, reducing the taxable base and, therefore, the amount of taxes to pay.
- Fixed Fee: A fixed Personal Income Tax (IRPF) and VAT fee is paid, regardless of the actual profit. If the profit is higher, less tax is paid.
- Accounting Simplification: Accounting is simpler, focused on recording investment assets, sales, issued and received invoices, and applied modules.
6. Offset Losses and Gains in Investments
- Use losses to offset gains and vice versa in the Personal Income Tax (IRPF).
- The Spanish Tax Agency allows compensation between capital gains and losses.
- In 2021, subtract losses from 20% of movable capital income.
- You can use this strategy for four years for accumulated losses.
- Consider advancing the collection of investments before potential tax increases.
- The sale of a home is also considered a capital gain.
- The 2022 tax reform establishes new brackets for savings income in 2023.
7. «Deductible» investments
Deductions for investments and expenses of cultural interest: Some regions may offer tax deductions for investments in cultural or artistic activities. These deductions are usually intended to promote and support the cultural sector and may include investment in film production, museums, foundations, etc.
Investments in newly created companies: Some jurisdictions offer tax incentives for investments in start-up companies. These incentives may include tax deductions or credits for investments in startups or innovative companies, with the aim of promoting job creation and economic growth.
Investment in BME Growth companies: In some autonomous communities of Spain, such as Aragon, Galicia, and Madrid, it is possible to deduct part of the investment made in companies listed on BME Growth (formerly known as the Alternative Stock Market). This can offer tax benefits for those who invest in growing and expanding companies.
Deduction for investments in live shows: Some regions offer tax deductions for investments in live performances, such as concerts, theater, or cultural events. These deductions are designed to promote the entertainment industry and may allow companies to deduct part of the expenses related to the organization of these events. Then the production companies offer that deduction as an investment.
- Pension plans: Investing in pension plans offers tax advantages by allowing the deduction of contributions in the tax return, which reduces the tax burden.
- Investments in investment gold: Some countries offer tax benefits for investments in investment gold, such as VAT exemption or reduced rates on capital gains. These incentives may vary depending on location and current tax regulations.
It is important to note that tax deductions and incentives may vary depending on the location and specific tax laws of each region. Therefore, it is essential to consult with a local tax or financial advisor to get accurate information on how to take advantage of these tax opportunities in your area.
8. Buying and selling
You can incorporate into your company's bylaws activities such as real estate investment, the purchase and sale of vehicles, watches and other assets. This gives you the flexibility to acquire and use various types of assets, the most common being real estate, vehicles, and luxury products.
Imagine you have a company dedicated to the purchase and sale of vehicles. You can buy luxury vehicles, such as classic cars, and then sell them to collectors or enthusiasts. During the time you hold the vehicles in the company's possession, you can deduct expenses such as maintenance, insurance, and storage costs. When you sell a vehicle, the resulting profits will be subject to corporate taxes, and you can reinvest them in the acquisition of other assets or vehicles.
Real estate for lease: Investing in real estate intended for leasing can generate tax deductions related to expenses such as maintenance, repairs, mortgage interest, and depreciation. However, the time that elapses from purchase to rental can take years, the same with the sale.
9. Salary in kind
The salary in kind refers to any form of remuneration received by an employee that does not consist of money as such. Instead of receiving a monetary salary, the worker receives tangible benefits or services as part of their compensation for the work performed.
The limit for payments in kind is 30% of the worker's total gross salary , which brings tax advantages as they are exempt from taxation up to certain amounts in the Personal Income Tax (IRPF).
The Spanish Tax Agency establishes exclusions for work income that is not subject to taxation, such as company shares for an annual value of less than 12,000 euros, studies for staff training, restaurant tickets for specific amounts, nursery vouchers, work accident insurance, among others.
Conclusion
Legal tax avoidance plays a very important role in Spain if we want to move our businesses forward, it is important to train oneself in strategies to pay less taxes legally as well as learning how it works Spanish tax system.
Remember that there is a fine line between avoidance and evasion, make sure before taking action to speak with an experienced tax advisor. You can send us an email at info@elutax.com, we can help you legally reduce your taxes by applying the strategies mentioned above in addition to many others.
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