Many expats in Spain start their business life as autónomos because it is quick, cheap and your gestor can set it up in an afternoon. That works fine at the beginning, but as profits grow the Spanish tax system starts to quietly reward those who move their activity into a Sociedad Limitada (SL) and use a couple of little‑known incentives that autónomos simply do not have.
Autónomo vs SL in plain English
As an autónomo you and your business are the same legal person. You pay IRPF on all of your profit, with progressive rates that get heavier as you earn more. Accounting is relatively simple, but you have very few real tools to plan your tax bill beyond deducting expenses.
An SL is different. The company is a separate legal entity and it pays Corporate Tax (Impuesto de Sociedades) on its profits at a flat rate. You then pay personal tax only on what you actually take out in the form of salary or dividends. Running an SL means more paperwork, higher asesoría fees and stricter accounting rules, but it also opens the door to specific company‑only incentives that can reduce the amount of profit that is taxed.
For low and unstable profits, being autónomo usually wins on simplicity. When your business becomes stable and profitable, the lack of planning options under IRPF starts to hurt and the SL structure becomes more interesting.
The double incentive few small companies use
One of the most overlooked advantages of operating through an SL in Spain is a pair of fiscal tools designed for small companies: the capitalisation reserve and the equalisation (nivelación) reserve. Used correctly, they allow a qualifying SL to reduce the taxable base of Corporate Tax by up to around 30 percent compared with its accounting profit.
These reserves do not exist for classic autónomos. They are built into the Corporate Tax rules and only apply to companies, which is why almost every discussion about them talks specifically about pymes and not about self‑employed individuals.
Capitalisation reserve: rewarded for not emptying the company
The capitalisation reserve is essentially a reward for leaving money in the business instead of draining every euro out at the end of the year. If your company finishes the year with a profit and you decide to retain part of that profit inside the company, the equity of the SL increases.
You can allocate a portion of that increase in equity to a special line in your accounts called the capitalisation reserve. That reserve must remain in the company for a minimum period and cannot be freely distributed as dividends. In exchange, the law allows you to reduce the taxable base of Corporate Tax by a percentage of that equity increase.
In practice, this means that a slice of the profit you keep inside the company never enters the taxable base now. The SL pays Corporate Tax on a smaller figure, leaving more cash in the business to finance growth, build a buffer or prepare for future investments.
Equalisation reserve: smoothing good and bad years
The equalisation or nivelación reserve is aimed at small companies that qualify as pymes. It is designed to smooth your tax bill across good years and bad years by letting you bring forward a deduction.
In a profitable year, if your SL meets the size conditions, you can reduce your current taxable base by up to a fixed percentage and allocate that amount to an equalisation reserve. If in the following years your company generates negative tax bases, that reserve is used to absorb those losses. If no losses appear within the legal period, the reserve is re‑added to the taxable base later, but you have already enjoyed a tax deferral in the meantime.
The result is simple: you pay less tax in a strong year and have a cushion to protect you in weaker years. For expats in sectors with seasonal or cyclical income, this can make the difference between a manageable April tax bill and a nasty surprise.
How small companies reach up to 30% reduction (with examples)
The really interesting part is that many small SLs can use both reserves in the same period. First, you calculate your company’s profit and determine how much of the increase in equity can go into the capitalisation reserve. That gives you a reduction in the taxable base. Then, on the remaining base, if your company meets the conditions to be treated as a small entity, you can apply the equalisation reserve and take off another percentage.
To see what this looks like in practice, imagine an expat‑run SL in Spain with an annual profit of 80,000 euros. The company decides to leave 20,000 euros of that profit inside the business to strengthen its equity. A portion of that 20,000 can be allocated to the capitalisation reserve, which might allow, for example, a 10,000 euro reduction in the taxable base. In that case, instead of taxing 80,000 euros, the SL would only be taxed on 70,000 before even applying the second incentive.
Now add the equalisation reserve. Suppose that, after the capitalisation adjustment, the taxable base is those 70,000 euros and the company qualifies to apply a 10 percent equalisation reserve. That would allow it to reduce the current base by another 7,000 euros. The Corporate Tax would then be calculated not on the original 80,000 euros of profit, but on a base of 63,000 euros.
At the standard Corporate Tax rate of 25 percent, the difference is clear. Without using reserves, tax on 80,000 euros would be 20,000 euros. With the combined effect of the capitalisation and equalisation reserves in this example, tax would be 15,750 euros (25 percent of 63,000). That is a saving of 4,250 euros in just one year, achieved simply by structuring profit and reserves correctly.
Scale that up and the impact becomes even more visible. If the same company consistently generated similar profits and applied the reserves each year, the cumulative savings over five years could easily run into tens of thousands of euros compared with doing nothing. For an expat owner who plans to stay in Spain and grow the business, that extra cash can be used to hire staff, invest in marketing or simply build a stronger buffer for tougher times.
Comparing this with staying as autónomo
To understand why this matters, it helps to compare the same 80,000 euros of profit in the hands of an autónomo. As a self‑employed person, that entire amount would be fed into the IRPF tax scale after deductions. Depending on the region and your other income, a good chunk of the profit would be taxed at higher marginal rates, and there would be no equivalent mechanism to take ten or fifteen thousand euros out of the taxable base just because you left money in the activity.
In simple terms, the autónomo pays personal income tax on almost the full profit every year, while the SL can legally push down the Corporate Tax base by using reserves and then decide later how and when the net profit flows into the owner’s personal tax return. When profits are modest, the difference is small; when the numbers are like the example above or higher, the gap in total tax paid starts to become impossible to ignore.
Why autónomos miss out completely
If you remain as an autónomo, none of these levers exist in the same way. There is no capitalisation reserve in IRPF that lets you say “I left profit in the activity, so reduce my personal tax base.” There is no equalisation reserve that allows you to bring forward a deduction and then absorb future losses.
All of your business profit flows straight into your personal income tax return. You can deduct legitimate expenses, but the overall structure is rigid. Once the year is closed and your IRPF return is filed, there is very little you can do beyond basic timing of invoices and costs.
This is why, once a business reaches a certain size, many serious operators quietly move from autónomo to SL: the company format simply gives you more tools to legally control how much tax you pay and when you pay it.
When an expat should seriously consider an SL
The double incentive is not a magic solution for every freelancer issuing a few facturas on the side. It becomes interesting for expats who are running a real business in Spain and are already generating consistent profits.
As a rough rule of thumb, if your net profit from the activity is still low or jumps wildly from year to year, staying as autónomo is usually fine. The administrative cost and hassle of an SL will cancel out much of the theoretical tax gain. On the other hand, if you are consistently making solid money year after year, the picture changes.
The profile that tends to benefit the most looks like this: you are making something like fifty to sixty thousand euros or more per year in net profit from your Spanish business, you do not need to withdraw every cent for your personal life, and you see yourself continuing in Spain for the medium term. Under those conditions, an SL combined with capitalisation and equalisation reserves can significantly reduce your effective tax rate compared with staying as an autónomo.
What expat business owners should actually do
The sensible next step is not to rush into opening an SL, but to put hard numbers on the table. Start by calculating your average annual profit over the last two or three years. Then decide how much you could realistically leave inside a company each year without damaging your standard of living.
With those two figures, a good asesor can model two scenarios for you: one where you stay as autónomo and keep paying IRPF on all your profit, and another where you operate through an SL, pay Corporate Tax, apply the capitalisation and equalisation reserves and then pay personal tax only on what you actually take out.
If the company scenario does not clearly improve your after‑tax position, there is no rush to change structure. But if the simulation shows a consistent saving and you are comfortable with the idea of leaving some money inside the SL for several years, then these little‑known incentives are exactly the reason why many expat‑run businesses in Spain eventually stop being autónomos and grow up into proper companies.
