Taxes for Businesses: Comparison Between Spain and the United States

Spain has one of the most demanding tax systems in Europe. Businesses face a variety of tax burdens that impact their profits and reinvestment capacity.

1. What Happens If You Are Taxed as an Individual?

Personal Income Tax (IRPF):

• Progressive Rate Based on Income: Marginal rates range from 19% to 47%.
• Freelancers: Taxed based on their taxable income, which is calculated as total income minus deductible expenses.

Value-Added Tax (VAT):

• Similar to businesses, freelancers must apply a 21% VAT rate to most goods and services and remit it quarterly.

Social Security for Freelancers:

• Starting in 2023, contributions are based on actual income, with a minimum monthly fee of €230 and a maximum of €500.
• Contributions are mandatory, even if income is low or non-existent.

Disadvantages of Being Taxed as an Individual:

• High Tax Rates: The progressive IRPF rates can be more expensive than the flat 25% corporate tax rate.
• Greater Personal Liability: Freelancers are personally responsible for debts or legal liabilities.
• Mandatory Contributions: Social Security payments are required regardless of income, creating a fixed financial burden.

2. Taxes Businesses Pay in Spain

1. Corporate Tax:
   • General Rate: 25%.
   • For Small and New Businesses: Reduced to 15% for the first two years of profit.
2. Value-Added Tax (VAT):
   • Standard Rate: 21%.
   • Applies to most goods and services.
3. Regional and Local Taxes:
   • Each autonomous community can impose additional taxes, such as property tax (IBI) or economic activity tax (IAE).
4. Social Security Contributions:
   • Employers must make significant contributions for each employee, typically ranging from 29% to 35% of gross salary.

This model often results in smaller businesses paying proportionally higher taxes than large corporations.

3. How Are Businesses Taxed in the United States?

The U.S. tax system is much more competitive, designed to attract investment and promote business growth.

Business Taxes in the United States:

1. Federal Corporate Income Tax:
   • Flat Rate: 21% for corporations (C-Corps).
   • LLC: Taxed as personal income if they opt for "pass-through entity" status, potentially reducing the overall tax burden.
2. State Taxes:
   • States like Florida, Wyoming, or Texas do not impose state income taxes on businesses, providing a significant advantage.
3. Sales Tax:
   • Ranges from 4% to 10%, depending on the state. Unlike VAT, this tax applies only to the final consumer.
4. Social Security Costs:
   • Lower compared to Spain, offering relief in labor contributions.

4. Tax Comparison: Spain vs. the United States

5. Benefits of Starting a Business in the United States

1. Lower Tax Burden: Reduced rates and the ability to operate in states without state taxes provide significant savings.
2. Increased Competitiveness: Operating under a U.S. LLC projects confidence and professionalism, attracting international clients.
3. Earn in Dollars: Protect your earnings against euro volatility.
4. Access to Investments and Global Markets: With a registered U.S. company, you can expand worldwide.
5. Flexible Taxation: LLC structures allow you to choose how you’re taxed based on what works best for you.

Conclusion

Comparing the tax systems of Spain and the United States makes it clear why many Spanish entrepreneurs choose to establish businesses in the U.S. If you're looking to reduce taxes, earn in dollars, and expand your business, starting an LLC might be the perfect solution.

At Prodezk, we guide you through every step so you can enjoy the fiscal and operational benefits of having a business in the United States. Start today and take your business to the next level!

If you're interested in this topic, check out our blog on how to set up an LLC in the U.S. from Spain.