VAT for Startups

Updated: Sep 6


Author: Jennifer Zhang

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Date of Publication: 02/09/2022




Do you want to start your own business in Spain but need more information about this country's legislation? Here is what you must know about Spain taxation when doing a startup.


Depending on how the government collects tax and what it charges, there are different types of taxes. Nevertheless, this blog focuses on one particular tax which is Value Added Tax (VAT). We are going to explain the following things:

● what this tax is

● how a startup can register to obtain their own VAT number before starting their business activity and

● when to file VAT returns.

cubes - coins - VAT for Startups

What is VAT?

VAT is a general tax charged in percentage to all goods and/or services purchased and sold for consumption in the EU.

Currently, VAT in Spain is set at 21%. However, reduced tax rates are possible depending on the nature of the activity. For instance, necessities such as food and medicines are at 4% VAT. On the other hand, electrical bills and transport services are 10%. The following table shows a comprehensive detail of which tax rates are applied to which applicable goods.

TYPE OF VAT

VAT RATE

APPLICABLE GOODS

General VAT

21%

All other taxable goods and services

Reduced VAT

10%

Cultural activities (museums, exhibitions, …), public transportation, water and electricity supply, hospitality and catering services, farming and livestock products (fertilizers, herbicides, seed, …)

Super-reduced VAT

4%

Food and medicines, construction and domestic care services, social housing, newspaper and periodicals

VAT free

0%

Masks and hand sanitizer, financial products and healthcare products

It is important to remember that VAT is also a consumption tax. This means it isn’t an expense of the business, but it is borne ultimately by the final consumer who buys the good/service. Hence, when the good/service is sold, the business receives the paid VAT. This becomes a tax liability which needs to be regularly filed.


How to register

Before starting the business, the entrepreneur must apply for the Spanish VAT number. We commonly call this “Número de Identificación Fiscal” (NIF). To get the VAT number, the entrepreneur has to register at the local tax office of the Administración de la Agencia Estatal de Administración Tributaria (AEAT). The following supporting documents are necessary for the application process:

● VAT certificate received, if available, in other EU countries

● Declaration that the company does not have a permanent establishment in Spain

● Notarized Power of Attorney of your local agent or representative in Spain.

● Articles of Association and memorandum

● An extract of the company from the national trade register


When to file VAT

Generally, businesses have to file and pay VAT returns depending on the amount of net sales generated in their previous year.

● On a monthly basis by the 20th, if the net sales generated exceeds EUR 6,010,121.04

● On a quarterly basis by the 20th, if the net sales generated is less than EUR 6,010,121.04

Businesses also must file annual VAT returns by January 30 of the following year.

Newly established companies that don’t have previous sales figures should estimate the sales or consult the tax office to determine when to file VAT.


How to recover VAT

Businesses can reduce VAT liability with input VAT. This is only possible when the entrepreneur purchases goods or services used for his business activities.

However, there are certain items that cannot deduct VAT, which are:

● Goods and services which are exempt from VAT rate

● The purchase of goods and services for private use and unrelated to the business activity. However, when VAT relates to both business and non-business activities, it is partially deductible

● Other general expenses such as invoices and bills addressed to employees


Conclusion

All entrepreneurs who decide to start their business in Spain must comply with tax regulations and complete VAT registration accordingly. Failure to register on time may be subject to fines as well as interest charges on late VAT payments. This is typically 5% per month overdue. Other fines for non-compliance can range from 50% to 150%. Hence, we advise that you apply for a VAT number as soon as possible. What’s more, you should prepare the required documents beforehand to avoid any delays in the application process.

 

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