Freelancer vs Limited Company: When Tax Savings Fail

Freelancer vs Limited Company: When Bureaucracy Eats Tax Savings

High-earning freelancers often receive the classic advice from their advisors: set up a limited company (Sociedad Limitada, SL), pay Corporate Income Tax (Impuesto de Sociedades), and save on Personal Income Tax (IRPF). The problem arises when doing the real math. Savings only exist for money kept within the company; salary withdrawals are taxed again under IRPF, and dividends incur another 19% to 28% tax in the savings base. If profits are needed for living expenses, the advantage evaporates.

The initial question was whether rejecting an SL is madness. The consensus in the discussion is no: it is a cost-benefit decision where personal time has a price.

Revenue Thresholds for SL Viability

A calculation circulating in the thread places the break-even point high. With Corporate Income Tax around 23-25% for SMEs and dividend taxes at 19-23%, the combined rate approaches 36% before adding accounting fees, which cost €3,000 to €5,000 more annually than for a freelancer. According to this calculation, an SL only becomes fiscally sensible above €100,000–€120,000 in annual profit.

Below that threshold, what remains is paperwork. Accounting, inventory, cash flow, delivery notes, reconciliation: administrative work that doesn't automate easily in activities with high physical volume, despite trendy tools claiming otherwise. Those who have managed a company summarize it by noting their accountant charged 50% more.

The Salary Required by Tax Authorities

Here lies the nuance that dismantles the advisor's promise. In professional service companies billing highly personalized services, related-party transaction rules allow tax authorities to accept partner remuneration if it reaches at least 75% of pre-tax results. In commercial activities, there is no fixed percentage, but market value criteria apply, and inspections adjust cases where the company lacks own resources and all profit comes from the partner's work. Some argue that with mandatory salaries of 70-85% of profit, the fiscal advantage practically disappears.

Structure That Changes the Diagnosis

The scenario shifts when there is leased premises and employees. There, the activity is clearly business-oriented, giving tax authorities less room to claim it is a shell company, and limited liability comes into play: as a freelancer, you answer with personal assets; with a company, in principle, only with company assets, except for signed guarantees.

The real risk is not the legal form but the motive. Moving from freelancer to company without capital increase, new partners, or added structure leaves one open to being considered a tax evasion maneuver. The case of an interposed company invoicing conferences or consulting that only its owner can provide is the example pursued by tax authorities with adjustments and sanctions.

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The alternative of waiting remains. With the political calendar ahead and a program offering nothing attractive on fiscal matters, many prefer not to make a move yet. The analysis stalls right there: nobody disputes the numbers, but there is also no certainty about how long the framework supporting them will last.