One of the most common questions we get asked, especially since the pandemic, is if a UK limited company can be run from Spain.
The answer is yes, but there are some grey areas which have to be addressed.
While you are likely to meet many Brits and other expats who've been doing it for years without any issues, chances are, if you are reading this post, you want to know how to do things properly.
1. Corporation Tax
In the UK, it's common for limited companies to have a single individual as shareholder and director, with the individual’s home address as the registered office. When this individual starts working from Spain, making sales and other business contracts, the business is now effectively being run from Spain.
The individual runs the risk of creating what is known as a permanent establishment in Spain. This is a complex legal concept but it means that the Spanish tax authorities have the power to demand that the company pays tax on all of its income.
What would this mean in practice? In a nutshell, you’d receive a corporation tax bill from Spain. Spanish corporation tax, at 25%, is higher than its UK equivalent. But this is beside the point. The bill would be for tax on profits which the company has already paid tax on in the UK.
You might be thinking .... wait, isn't there a double tax treaty? So the tax already paid in the UK can be deducted from Spain’s tax bill, can't it?
Unfortunately this isn’t how it works. The Spanish tax would have to be paid and then, separately, an application made to get the UK tax refunded. It could take a year or more to sort out the mess, leaving the business owner out of pocket and let's not forget the fees that would be due to accountants/lawyers in both countries.
There are ways to set up a UK company to stop this issue from occurring (for example, by making sure all of the decisions and contracts are made in the UK) but each case must be looked at on an individual basis.
2. Social Security
If you are receiving a salary from your UK company, there’s also the problem of social security (known as national insurance in the UK).
As an employee, social security gives you the right to healthcare, a government pension and other benefits such as sickness and unemployment pay.
But what happens if, for example, you get sick or made redundant but don't live in the country where you are paying social security? This is where things get complicated.
If you are an employee working from Spain, technically you should be paying social security contributions in Spain, unless you are only in the country temporarily. If the latter is the case, you can apply for an A1 certificate from HMRC which you can use to show the Spanish authorities that you are covered through your national insurance contributions in the UK.
Both of these solutions are usually too complex to consider in the context of a one-person company, unless you have a good reason for going down this route, such as applying for the Beckham Law.
How to Work From Spain Without These Risks
Here we are going to look at three ways in which you can structure yourself and your company to keep things above board.
Option 1: Closing Down the Limited Company/Setting up as Self-Employed in Spain
If you will only use the UK company to charge fees for the work done by its owner, i.e. yourself, the simple solution is to close it down and charge your clients directly.
While in the UK, it's tax-efficient to set up a limited company, pay yourself a small salary and to take the excess in dividends (something that may change as the dividend allowance is reduced), this is not the case in Spain unless you earn more than around 80.000€ each year. If you earn less than this, you'll pay less tax if you are self-employed.
Setting up as self-employed in Spain is quick and simple (we can help), and it allows you to be part of the Spanish social security system. You and your family will have full access to the national health and benefits system, as well as pension rights. Making contributions to the Spanish system for a minimum of 15 years will give you a retirement pension to complement your UK government pension.
If you are worried about losing your UK pension rights, note that you can continue making contributions to the UK system by paying Class 2 or 3 national insurance contributions.
Option 2: Setting up a Spanish company
This isn’t a popular option because of the bureaucracy and expense involved in setting up and running a company in Spain compared to the UK. For a simple business activity, where you are simply charging fees without employing staff or buying and selling goods, having a Spanish company would be unnecessarily complicated.
Of course, sometimes it's essential to have a company because of, for example, the need to have limited liability or to create a commercial image, as some regard a self-employed business as insubstantial.
This means that switching to a Spanish company may suit some, especially if you have Spanish customers.
Option 3: Keeping the Company/Setting up as Self-Employed in Spain
You might be reluctant to close down your UK company because of a long trading history and customers, suppliers, bank accounts and other commercial relationships. Or maybe you want to keep up a UK 'front'.
In addition, if the company has in the UK a place of business, employees, stock and physical assets, it would make perfect sense to keep it.
A good alternative to receiving a salary from the UK company would be to register as self-employed in Spain and issue invoices to the UK company for services rendered. This is a simple way of receiving income from the UK company and at the same time would give you and your family access to Spanish health, benefits and pensions systems.
Note that this last option doesn't mitigate the risk of inadvertently creating a permanent establishment in Spain - be sure to take advice on this.
Let’s not forget, thanks to Brexit, some of the options we’ve covered in this post are no longer possible for Brits without a visa or European passport.
UK nationals who were not resident before 31 December 2020 will not be able to work in Spain without first obtaining a work permit.
There are visas available for the self-employed and for those who intend to open a Spanish company, and the NLV (non-lucrative visa) may be an option for those taking only dividend income. Care must be taken when applying for the NLV as, although not specifically excluded by law, any form of work while in Spain is not permitted by the consulates who process the applications.
There’s also the new Digital Nomad Visa which may be an option for UK limited company owners. Under the DN visa, there may be a possibility of paying a 24% flat-rate tax on employment income only (with no tax on dividends), although this has not yet been confirmed by the Spanish tax authorities.
Working in Spain directly through a UK limited company is complex, with many potential pitfalls. While you will undoubtedly meet many Brits and other expats who've been doing it for years without any issues, chances are, if you are reading this post, you want to know how to do things properly.
Using any of the three options we've covered will give you the peace of mind to know that you won't receive an unexpected corporation tax bill and you'll have the bonus of Spanish healthcare, benefits and a future pension.
Want to keep up with the latest on the Spanish Digital Nomad visa?
Join our Facebook group - we only publish information from government sources or direct personal experience.