Written by Aquilino Pérez Puga, Managing-Director, AOS
Current economic situation in Spain.
Spain is the fourteenth largest economy in the world, being the fifth economy of the EU. With a GDP of 1.2 trillion USD, it has 46 million consumers, in addition to the 75 million tourists who visit Spain every year.
The services represent 75% of their business activity. It is an international focus of innovation that benefits from a young population, highly qualified, motivated, and with very competitive costs in the context of Western Europe, especially in regard to graduated and postgraduate professionals.
Spain is a member of the European Union which gives it access to the largest market in the world: the European Union, with 500 million people and a per capita income of 35,990 USD. This means that potential investors can benefit from:
• Free circulation of goods and services, capital and people.
• Trade without intra-community tariffs.
• A single currency.
• European programs and funds.
According to the OECD Index FDI Regulatory Restrictiveness Index, Spain is the ninth country in the world with a regulation more open to international investment.
Spain also has a highly developed business sector with a high degree of internationalization that offers excellent opportunities to collaborate in third markets. The Spanish economy has continued to grow in 2018, but more moderately (it is also the sign of the European Union). The indicators in the final stretch of 2018 (BE, INE) seem to point to a certain acceleration of GDP growth up to 0.7 percent (IV quarter), (0.6 percent in previous quarters).
By components, the following should be highlighted: pull of national demand at 3.0 / 3.1 percent growth, negative contribution to the growth of net external demand (-0.5 points), upturn in tourism (overnight stays) in the last stretch of the year, maintaining productive levels of 2017, slight rise in the confidence index of the construction sector, among others (BE, INE).
The statistics of tourist movements in borders in the first 10 months of 2018 indicates that the number of tourists visiting Spain increases by 0.5 compared to 2017 and is close to 73.9 million. The forecast of tourists for the whole year 2018 is estimated between 81/82 million entries. A good figure that has helped keep Spain’s growth above the European Union average.
The activity rate stands at 58.73 percent in the III quarter-2018 with a projection of 58.70 percent at the end of the year. Employment has grown 2.51 percent in the last 12 months. The estimated annual inflation of the CPI in November 2018 is 1.7 percent according to the indicator prepared by the INE. Core inflation would be below 1.0 percent. The Spanish economy therefore enjoys price stability.
The relationship between Spain and China
Bilateral trade between Spain and China goods is characterized by a chronic deficit. The volume of Chinese imports is in line with the surrounding countries, but the volume of exports to China is relatively scarce. In 2017, exports grew 28.3% year-on-year to 6,258 million euros (2.3% of total exports), ranking 10th in the world ranking. The main exported products were: copper and its alloys (13.1%), automotive equipment, components and accessories (6.5%), frozen pork meat (5.9%), raw zinc (4.1%), and copper waste and scrap (3.6%).
In January-October 2018, exports increased by 7.5% year-on-year, reaching 5,321 million euros (2.2% of total Spanish exports) and occupying 10th place in the world ranking. The main exported products were: copper and its alloys (16.0%), automotive equipment, components and accessories (8.4%), frozen pork (6.9%), women’s clothing (5.3%) and copper waste and scrap (4.4%).
In 2017, imports increased 7.1% year-on-year, totaling 25,662 million euros (8.5% of the total) and occupying the third place in the world ranking. The main imported products were: telecommunications equipment (5.5%), data and information processing and processing machines (5.3%), video consoles, consoles and board games (2.9%), leather goods (2.7%), and wheel toys (2.1%).
In January-October 2018, imports increased 3.2% year-on-year to 22,361 million euros (8.4% of total imports), ranking 3rd in the world ranking. The main imported products were: women’s clothing (7.6%), telecommunications equipment (6.8%), computer hardware (5.4%), organic chemistry (4.2%), and footwear (3.4 %).
In 2017, the trade deficit with China reached 19,404 million euros, up 2.3% on the previous year. The coverage rate stood at 24.4%, improving 3.9 percentage points in relation to the previous year. In January-October 2018, the trade deficit with China amounted to 17,040 million euros, down 1.9% on the same period of the previous year. The coverage rate stands at 23.8%.
The volume of bilateral trade in services is below its potential, largely due to restrictions and limitations for the provision of certain services by foreign companies, such as legal, financial, educational services, travel agencies. According to the INE’s International Trade in Services Survey, in 2017 2,177 Spanish companies, 5.2% more than in 2016, exported services to China worth 739.1 million euros (+ 15.7% year-on-year) , and 2,761 Spanish companies, 26.8% more than in 2016, imported services from China worth 633.9 million euros (+ 25.1% year-on-year).
The exchange of tourists between Spain and China is still quite scarce. After the signature of the Authorized Destination Agreement (ADS) in February 2004, which allows travelling to Spain for groups of Chinese tourists on organized trips, there has been a progressive growth, albeit starting from a small base. According to FRONTUR, 513,000 Chinese tourists visited Spain in 2017 (+ 37.1% year-on-year). It should be noted that the Chinese tourists are among those who spend more (average expenditure of 2,500 euros) and presents a different profile than the European tourist: in front of that tourism of sun and beach, (seasonal), the Chinese tourists seek a cultural offer, gastronomic, leisure and shopping. To encourage the development of this growing Chinese tourism, direct air connections with the country’s major cities must be expanded, visa processing expedited and the offer of tourist services translated into Chinese.
Role of AOS for Chinese and Spanish businessmen
Below we include in summary, the different options that a Chinese company can settle in Spain, issues that our professional services firm can carry out.
These offices cannot exercise economic activities. They should be limited to market studies to make the decision to settle or not definitively in Spain. Since they do not exercise any economic activity, they do not require any specific procedure.
The branch is a secondary establishment endowed with permanent representation and a certain management autonomy through which the activities of the parent company are fully or partially developed.
They are secondary establishments, where the full direction of the business does not lie; they are subordinated to the main establishment, both in the legal and tax aspects; they have the same business scope as the central headquarters.
They have a certain management autonomy with their own organization and a management body that holds sufficient power granted by the central office to serve its customers.
They lack legal personality; it is not a different society and legally independent of the main one. Despite the obligatory inscription in the Mercantile Registry, the inscription is not constitutive.
The identity with the object of the matrix can be total or partial, and it is perfectly normal that the activities of the secondary establishment of the company are only some of those contained in the single object of the matrix. The responsibility of the branch is not independent of that of the main establishment. The creditors of the branch are able to go against the matrix.
There is also the possibility of creating a subsidiary in Spain, which is a new company with its own legal personality and independent of the parent company. After the subsidiary is established, its activity can begin. The subsidiary, not the parent company, is obliged to deposit its annual accounts in the Mercantile Registry.
In addition, there are more ways for a foreign company to start the activity in Spain, such as temporary unions of companies, economic interest groups, franchises, joint venture, etc.
A) Direct taxation.
Corporation Tax (IS):
It is a direct tax that taxes the worldwide income of companies in Spain.General tax rate is 25% (there are special types for financial institutions that are subject to 30%).
Personal Income Tax (IRPF):
It is a tax that taxes the world income obtained by natural persons resident in Spain. Type of tax: general income (such as income from work or economic activity) is taxed on a progressive scale at a maximum rate of around 45%; savings income (such as interest, dividends or capital gains) are taxed at a maximum rate of around 23%. These types may vary depending on the Autonomous Community. Incentives for the international mobility of workers: impatriates can enjoy, on request, a special regime (taxed as non-residents when they meet certain requirements); and expatriates can take advantage of an exemption for the income derived from work carried out abroad.
Non-Resident Income Tax (IRNR):
It is a tax levied on income obtained in Spain by individuals or legal entities that are not tax residents in Spanish territory.
Permanent establishment (EP): the income that is attributed to the EP is taxed according to the IS rules.
Obtaining income without EP: • Main tax rates: • General: 24% (19% EU residents). • Dividends, capital gains and interest: 19%. • Royalties: 24%. • Main exemptions: • • Exemption of capital gains (excluding real estate, real estate companies and substantial shareholdings in companies) and interest obtained by residents in the EU.
B) Indirect taxation
Value Added Tax (VAT):
It is an indirect tax that taxes the deliveries of goods, services, intra-community acquisitions and imports made by entrepreneurs or professionals in Spanish territory (excludes the Canary Islands, Ceuta and Melilla).Types of tax: 21%, 10% and 4%.
Capital Transfer Onerous (TPO): It is an indirect tax that taxes the onerous transmissions of goods and rights as well as the constitution of real rights of use, enjoyment, guarantee, personal rights (loan) and administrative concessions made by persons or entities that are not entrepreneurs or professionals in the exercise of their activity, as well as certain real estate transactions not subject to or exempt from VAT.Types of lien: 1% -10% depending on the taxable event and the Autonomous Community.
Documented legal acts:
Among others, the granting of public documents susceptible of registration in a Registry. Types: 0.5% -2%.
Tax that is levied on certain corporate transactions, such as capital reduction or liquidation. Exemption constitution and capital increase. Type 1%.
Tax on Economic Activities (IAE):
Local tax levied on companies with INCN of at least € 1 million for carrying out activities in a given municipality through the application of tariffs defined according to the economic activity carried out.
Building, Installation and Works Tax (ICIO):
Local tax that taxes the realization of any construction, installation or work for which the obtaining of the corresponding urban license is required. Maximum rate 4% of the cost of the work (depending on the municipality).
Social Security contributions
Maximum base: 3,803.7 euros from August 1, 2018.
Types of contributions under the general regime: • At the employee’s expense: a total of 6.35% for all contingencies (6.40% for fixed-term contracts). • At the employer’s expense: a total of 29.90 for all contingencies except AT / EP (31.10% for fixed-term contracts).
Regulation: the employment relationship is regulated by the employment contract, the collective agreement, the workers’ statute as well as other European and international standards.
Modalities of contracts:
• For an indefinite period, it is the general rule
• Training and learning
• Of practices
Salary: can be set in the employment contract or collective agreement of the professional group cannot be lower than the minimum wage (in 2019 is € 900 gross per month).
Working day: will be agreed in the contract or agreement cannot exceed a maximum of 40 hours per week on average per year.
Holidays: 30 calendar days (can be improved by the Collective Agreement).
Foreign workers: it requires obtaining a work permit (depends on the contract and the type of work) except EU citizens who are exempt from obtaining it.
For Spanish companies that want to promote themselves in China.
The meeting held between the Spanish president and the Chinese president last November, is an impetus for an adequate economic framework for Spanish business activities in China.
Several agreements have been signed, including two agricultural protocols, one that sets phytosanitary requirements for the export of table grapes from Spain to China, which means the opening of the Chinese market to this product, and another that regulates the sanitary requirements for expand pig meat products that can be exported to the country.
The agreement includes frozen meat and offal -which, although were already exported, did not have legal coverage-, fresh meat and cured products, such as ham with bone, palette, pork loin, sausage and chorizo. A double taxation agreement was also signed, a memorandum of understanding on third markets in countries of Asia, Africa and Latin America and another on employment and social security.
The sectors that can benefit the most from this increase in imports are the industrial and technology sectors, which account for 70% of the total of Spanish exports.
Faced with the sectors that contribute the most to Spanish sales, the ones that show the greatest growth opportunities are agri-food, especially pork, and women’s clothes. The pork derivatives are the third most sold product by Spain, with 324 million euros, and will suffer an exponential growth of sales in the short term with the opening of the Chinese market to Iberian ham. Until now, only the sale of boneless and cured meat was allowed for 313 days.
AOS Abogados, Asesores Tributarios y Auditores
AOS is a Spanish legal, accounting, tax and auditing firm in Spain providing legal advice for business international growth. AOS has vast experience in settling issues in Spain and abroad, in close contact with law firms in different countries, and providing support for the incorporation of companies or branches in various countries around the world.
AOS goes hand in hand with their clients to offer advice to them in the acquisition and sale of companies. AOS participates in the negotiation and conduct the execution works until the process is completed.
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