This article will focus on the Personal Income Tax (IRPF) in Spain. And on the other hand, how is IRPF related to withholdings in invoices?
Table of Contents
The doubts raised regarding the obligatory nature of the IRPF fractional payment form 130 and the obligation to apply withholding or not to income invoices by a self-employed professional are repeated.
Let us start with a situation that often arises among our clients and in which you can see yourself reflected.
Imagine a freelancer who develops a professional activity related to those in section 2 of Royal Legislative Decree 1175/1990, of September 28, such as the collection in group 763, which is Computer programmers and analysts.
Must that self-employed person always make his income invoices with withholding?
Yes, but only when he bills a Spanish company or freelancer. In the rest of the cases, billing to companies or business people from EU countries or third countries or billing to Spanish or foreign individuals, he does not have to make the invoice with withholding because these clients are not taxpayers of personal income tax in Spain.
What withholding should he apply?
The generic withholding percentage is 15%, but a reduced rate of 7% can be applied by those self-employed who begin their professional activity (without having exercised another professional activity in the last 12 months) in the beginning exercise and the 2 following. Let’s put some examples to make it more straightforward.
Example 1
Self-employed who register for the first time for professional activity in September 2022 can apply 7% for 2022, 2023 and 2024 years.
Example 2
A self-employed person who first signed up for professional activity in 2020 and applied 7% until it ceased in January 2022. Now in September 2022, he resumes the same professional activity. Does he have to apply 15% because, in the last 12 months, he has developed a professional activity?
If we apply the general rule, the answer should be yes. Still, there is the following exception, if you resume the same activity that allowed you to use the 7% withholding, you can continue to apply it until the term you originally had. In this case, you can continue to apply 7% until 31/12/2022.
If instead of resuming the same activity, you start another different professional activity, yes, you would have to apply 15%.
Does it have any tax advantage to retain 7% and not 15%?
The advantage is not fiscal but financial. That is, your invoices go with 7% withholding benefits you in that the amount you charge for each of them is higher, which offers you more liquidity during the year.
Let’s go with a simple example. If the service you offer costs € 200.00, and you apply VAT at 21% less withholding at 15%, the amount you charge amounts to € 212.00, but if the withholding is 7%, the amount you charge amounts to € 228.00.
Does a professional who retains 7% tax the same as another who retains 15% in Personal Income Tax (IRPF)?
Yes, the average tax rate (ATR) that corresponds to it according to the IRPF tables will be applied, and if both have the same net return (income minus expenses), they will be taxed for the same amount.
If we imagine that you both have to pay € 500.00 per Annual personal income tax (renta), and the one who holds 15% has been withheld € 300.00 (15% of € 2,000.00 of income), you will only have to pay € 200.00 in Annual personal income tax, while the one who retains 7% has been retained € 140.00 (7% of € 2,000.00) so he will have to pay € 360.00 in renta.
I carry out a professional activity subject to withholding. When is it mandatory to submit form 130?
The tax rule establishes that if more than 70% of your income was subject to withholding in the previous year, you have no obligation to submit form 130. But what happens to the professionals who start the activity and need to know where their income will come from: from individuals, from Spanish companies, from foreign companies, etc.?
In these cases, the rule does not require the submission of form 130. The self-employed may be in the first fiscal year without submitting form 130 and billing only to individuals so that they will not be contributing anything through Personal income tax, which means that when making the Annual income tax he will have no payment on account and will not have to pay all the taxes at once.
Our advice
For that reason, we advise our clients that if they anticipate that they will bill individuals or foreign companies, billing without withholding, submit the form 130 quarterly, and thus contribute to IRPF, avoiding significant disbursements in Annual income tax (renta).
On the other hand, it is always mandatory to submit form 130 when any business activity of those related in section 1 of Royal Legislative Decree 1175/1990, of September 28, is carried out. However, you also exercise a professional activity subject to withholding.
In these cases, when submitting form 130, you will have to pay as a fractional payment 20% of your quarterly net return (income less expenses). To that amount, we subtract the withholdings practised on the invoices issued by your professional activity.
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