Pablo makes 70,000 € of profit as a self-employed professional (an autónomo, the Spanish term for a sole trader) and hears that once he passes 40,000 € he should set up a company. That threshold does not exist as a general rule. The correct comparison does not simply set his marginal income tax rate against the 25 % corporation tax rate: it includes the business rate that applies that year, salary, dividends, Social Security, the costs of the structure and how much profit he can leave inside to reinvest.
25 % is not the whole calculation
A company pays corporation tax (Impuesto sobre Sociedades) on its taxable base. In 2026 the general rate remains 25 %, but entities with a turnover below one million euros can apply, if they meet the requirements, a transitional scale of 19 % on the first 50,000 € of base and 21 % on the rest. Smaller companies under article 101 of the Corporation Tax Act (turnover below 10 million euros, among other conditions) have a transitional rate of 23 % in 2026. Newly created entities may have 15 % in the periods the law provides. A rate should not be picked merely because a company is set up.
And the company's money does not become personal money free of tax. If you work for it, your pay has to be justified and is taxed in your income tax (IRPF). If you distribute the remaining profit as a dividend, it is taxed again in the savings base, the part of Spanish income tax that covers investment income. If you leave it in the company to finance the activity, there is no dividend yet, but you cannot use it for private spending either.
| Item | Self-employed individual | Company |
|---|---|---|
| Profit of the activity | Progressive income tax | Corporation tax |
| Money to live on | Already belongs to the owner | Comes out as salary, dividend or another justified transaction |
| Accounting | Record books according to the scheme | Commercial accounts and annual financial statements |
| Fixed costs | Generally lower | Incorporation, accounting, annual accounts and company obligations |
| Liability | Personal, with the legal nuances | Limited in principle, with exceptions and the director's duties |
Two businesses with the same 70,000 €
Picture two activities with 70,000 € of profit before paying the owner. In the first, the owner needs to take out the whole 70,000 € to live on. In the second, the owner needs only 35,000 € and can leave the rest in for several years to hire staff or invest.
In the first case, the company pays tax on the profit it keeps and the shareholder is taxed on the salary or dividends received. The two layers together, plus the costs of the structure, can eat up the apparent advantage. In the second, deferring distribution keeps resources inside the business and may make the company more reasonable. It is not an exemption: personal tax appears when the money is paid out as pay or distributed.
A serious simulation starts from these variables:
- the stable profit expected, not the best month multiplied by twelve;
- the net money you need to take out each year;
- reasonable pay for the work and for the functions of director;
- the corporation tax rate that applies and the effective income tax rate;
- the additional yearly cost of accounting, annual accounts, payroll and advice;
- plans to hire, bring in partners, invest or sell the business.
You can put those figures into the self-employed form. The comparison should use at least a cautious scenario, a central one and a growth one, because setting up a company for one year's exceptional profit may not cover its recurring costs.
Salary and dividends are not freely interchangeable
A salary for real work is an expense for the company if it meets the requirements of correlation, justification and valuation. For directors and shareholders there are company-law, articles-of-association and related-party rules that have to be coordinated. Setting an artificially low salary to accumulate profit, or a disproportionate one to empty the company, can be challenged.
A dividend is paid out of profit after corporation tax, requires a resolution and distributable reserves, and is not a deductible expense for the company. The shareholder includes it in the savings base. Taking money out through personal payments, indefinite loans or invoices with no real service behind them creates accounting and tax risks; the company's bank account is not a second personal account.
The costs people tend to leave out
A company requires a deed and registration, accounts kept under the Código de Comercio (the Spanish Commercial Code), legalisation of the books, preparation and filing of the annual accounts, and the corporation tax return. There may be payroll, withholdings and instalment payments. Add to that the time spent keeping personal and company decisions apart.
Social Security contributions do not disappear automatically either. A shareholder who controls the company and works in it may be placed in the RETA, the social security scheme for the self-employed, as a so-called corporate self-employed person. Limited liability protects in many cases, but it does not cover personal guarantees, one's own debts or failures by the director.
Before comparing structures, pin down the real profit. Expenses that are not deductible for an individual do not become deductible because a company pays them. The same discipline applies to the car and fuel and to the costs of working from home.
When it is worth running the numbers
A company starts to make sense when there is recurring profit that can stay in the business, contractual risk worth separating, a need to bring in partners, or an operation that calls for a corporate structure. If all the profit leaves each year for personal spending, the tax saving usually narrows and the costs weigh more.
The comparison has to be made with several scenarios and the rates in force for the year, not with a universal threshold of 40,000, 60,000 or 100,000 €. Payments on account also have to be checked: Modelo 130 is not the final tax, just as a company's instalment payments are not its annual settlement.
Money that leaves and money that stays
Suppose 80,000 € of profit before paying the owner. If the owner needs 60,000 € gross for personal spending, the company keeps hardly any resources after salary, contributions, expenses and tax. The comparison has to add the company's tax to the personal tax on what the owner receives.
If the owner needs only 30,000 € and leaves the rest to hire staff, the company can defer personal tax on the undistributed profit. The money kept finances the activity; it cannot pay for the shareholder's holidays or home. When it is distributed as a dividend, the second layer appears.
| Question | Effect on the comparison |
|---|---|
| How much do you need to take out? | Determines salary and possible dividends |
| How much can you reinvest? | Measures the benefit of deferral |
| Is the profit stable? | Avoids deciding on an unusual year |
| Are there employees or partners? | Adds structure and obligations |
| Which corporate rate applies? | Replaces the cliché of 25 % |
We do not calculate a final figure here, because income tax depends on total income, personal circumstances and the autonomous community, and corporation tax on the base, the rate and adjustments. The table shows which variables have to go in.
Related-party transactions and personal expenses
The shareholder and the company are separate taxpayers. Rentals, loans, services and transfers between the two must reflect a real transaction, be documented and be valued under the applicable rules. Turning personal expenses into company invoices does not produce a legitimate saving.
If the company uses a room in your home or a vehicle of yours, it is not enough for it to pay the bills. The relationship, the use, its value and the consequences for both sides have to be defined. The structure adds questions; it does not remove the rules on assigning assets to the activity.
The cost of turning back
Incorporation is only the beginning. If the activity does not prosper, dissolving and winding up requires resolutions, a deed, registration, balance sheets and returns. A dormant company keeps its obligations until it is struck off. That expected cost belongs in the decision alongside the yearly upkeep.
Contracts, licences, intellectual property, clients and assets that would pass from the individual to the company also have to be weighed. Contributing or transferring them can have tax effects and should not be improvised after you have started invoicing through the company.
At Salama Tax we analyse the individual's taxes and the consequences of the change, but this service does not keep the books of companies.