Comprehending Payroll in Spain

Comprehending Payroll in Spain

Located on the Iberian Peninsula, Spain is one of the most attractive business destinations in the world. With a highly developed and fast-growing economy, it allows multinational corporations to access a highly qualified workforce at competitive labor costs.
As an EU member, Spain enjoys trade access to the European Union. Spain also shares strong trade links with the Middle East and North Africa, given its geographical proximity to both, as well as with Latin America, with whom it shares a cultural and historical relationship. As a gateway to multiple markets, Spain has seen over 14,600 foreign firms establish their operations in the country.
To create a successful workforce in Spain it is imperative for HRs and payroll leaders to understand the nuances related to payroll in the country. Collective agreements are made between the worker’s representatives and businesses which can have a considerable impact on the structure of payroll. Additionally, in the wake of the covid-19 pandemic labor laws are being revised continuously. This has brought certain payroll challenges to the fore which affect remote working and equal pay. The government offers limited time for employers to comply with such measures.
In this article, we highlight important points that global organizations need to know about payroll in Spain for successfully navigating the nation’s complex labor regulations including taxation, social security, employment laws, and statutory payroll reports required to be maintained. Let us look at each in detail.

Withholding Tax
The Tax Year in Spain runs from January 01 to December 31.
For income taxation in general, the taxation of a resident of Spain (Impuesto sobre la Renta de las Personas Fisicas, abbreviated as IRPF) is generally determined using two brackets:

  • A national set of income tax brackets (Simplified Tax Rate Table), with rates ranging from 19% to 47%, for income in general that applies to all residents of Spain regardless of their specific location of residence in the country, and
  • One set of income tax brackets among numerous sets of jurisdictional income tax brackets corresponds to their autonomous community or autonomous city of residence. There are 17 jurisdictional income tax brackets specified by Spain's Tax Agency (Agencia Tributaria), including 15 for all the autonomous communities except Basque Country and Navarre, one for the autonomous cities of Ceuta and Melilla, and one for residents of Spain who are abroad.

Effective from January 01, 2021, the Simplified Tax Rate Table for withholding tax for resident employees is as under:

Taxable Income From
(€)

Taxable Income To
(€)

Amount
(€)

Rate
(%)

0,00

12 450,00

0,00

19,00

12 450,01

20 200,00

2 365,50

24,00

20 200,01

35 200,00

4 225,50

30,00

35 200,01

60 000,00

8 725,50

37,00

60 000,01

300 000,00

17 901,50

45,00

300 000,01

onwards

125 901,50

47,00

 

Minimum or tax-free threshold for personal and family including disability is also provided to the employees that reduce their tax amount.
Non-resident individuals are exempt from paying Personal Income Tax (IRPF) but instead must pay IRNR (Impuesto sobre la Renta de los no Residentes) on all Spanish sourced income. This includes income from the Basque Country and Navarre. Employers must withhold IRNR from each foreign employee's paycheck.
Effective from January 01, 2021, foreign employees who are not residents of an EU member country or a European Economic Area country are taxed at an income tax rate of 24% on annual income of up to €600 000, while annual income of more than €600 000 is assessed an income tax rate of 47%. Foreign employees who are residents of an EU member country or a European Economic Area country are taxed at a flat rate of 19%.
Tax rates for other special conditions are as under:

  • Special regime under Article 93.2 of personal income tax law for employees posted in Spain:

Taxable Income

Tax Rate

Up to €600 000

24%

Above €600 000

47%


  • Special rate of 35% or 19%, as may be applicable, in case of administrators and members of the board of director
  • Flat 15% for arrears taxable in the current year which correspond to previous years
  • Flat 2% taxable for seasonal foreign workers having fixed term contract

There is a specific deduction available for Ceuta or Melilla provinces of 60% on the above rates.
Withholding tax is applied on net income considering base salary and wages, supplementary salary or wages, benefit or salary in kind, allowances, complementary benefits in case of sick leave, maternity, or paternity leave, deductible expense, work income reduction irregular income reduction, and the exemption for employees send abroad for work.

Social Security Contribution
The next important aspect is the social security contribution that employers are required to make every month to Spain’s National Social Security Institute (Instituto Nacional de la Seguridad Social, abbreviated as INSS). Employers need to withhold contributions from their employees’ paychecks. The amount of these social security contributions, which cover pension plans, labor accidents, and illnesses, vary according to several factors such as length of employment or type of employment contract.
The Spanish social security system provides for a general social security scheme that includes most activities and applies to the majority of the workforce in Spain including residents and non-Residents as well as full-time, fixed-term contract, and part-time contract employees.
The different types of social security contributions are as shown below:

Category/Types

Subcategory

Employer contribution

Employee contribution

Total

Common Contingencies (seguridad social)

General

23,6%

4,7%

28,3%

Temporary contract having duration =<5 days

33,04%

4,7%

37,74%

Common (IT) in case of partial retired worker working and workers above 65 years of age

1,25%

0,25%

1,5%

Extraordinary hours

Extra ordinary hours force Majeure

12%

2%

14%

Rest of extra ordinary hours

23,6%

4,7%

28,3%

Unemployment (desempleo)

General type

5,5%

1,55%

7,05%

Full time fixed term contract

6,7%

1,6%

8,3%

Part time fixed term contract

6,7%

1,6%

8,3%

FOGASA (Fondo de Garantía Salarial)

-

0,2%

-

0,2%

Vocational training (formación profesional)

-

0,6%

0,1%

0,7%

Workplace accident and professional illness

Contribution rates are industry-specific

 

These rates are applied on common contingencies and professional contingencies base.
Calculation of social security contribution is subject to maximum and minimum ceilings provided by the agency, which varies as per the professional categories, ranging from €1 050,00 to €4 070,10.

Employment Laws
Employment is highly regulated in Spain. A key aspect of Spain’s employment legislation is the Workers’ Statute (Estatuto de los Trabajadores), which regulates many aspects of individual and collective employment relations. Many regulations around pay and working conditions in Spain are defined by collective bargaining agreements.
Employers in Spain must pay their employees monthly, or more frequently, depending on the employment contract or collective bargaining agreements. In addition to the minimum of 12 monthly payments, many collective agreements require two additional payments in July and December, which are pro-rated and included in monthly payrolls.
Foreign workers' wages are subject to the same regulations as residents' and, like residents, foreign workers may have their wages paid in any legal tender.
As per the Worker’s Statute, the following elements apply to an employee. These can be modified as per applicable Collective Bargaining Agreement (CBA) or individual agreement with the employee.

Extra ordinary Pay:

The worker has the right to two extraordinary payments a year - paga de verano” summer pay and called “paga de Navidad” Christmas pay. Some companies in order to process their payroll more effectively decide to do a pro-rata of these 2 extra payments and include them monthly so they can process only 12 pay cycles per year. However, some companies are still processing these extra pays in the traditional Spanish way which means processing 14 pay periods These can be increased to 3 or 4 as per the applicable CBA.

Holidays:

Public Holiday list is announced by the Spanish Government. Workers will enjoy a total of 14 public holidays, 10 of a national nature (of which 8 are common to the 17 communities and Ceuta and Melilla), 2 of a regional nature stablished by each autonomous community and 2 local that depend on the town councils of each city

Annual leaves:

30 annual leaves are available which are modifiable as per the applicable CBA.

Other Statutory Leaves:

The following additional leaves are also available as per the Worker’s Statute:

  • Marriage Leave: 15 days
  • For the childbirth and the death, accident or serious illness, hospitalization, or surgical operation without hospitalization, but requiring home rest, of relatives of up to the second degree of consanguinity or affinity: 2 days
  • In point 2 above, if the worker needs to travel for the purpose: 4 days
  • Moving in for a change of residence: 1 day
  • Absence from work to breast-feed an infant of less than nine months: 1 hour
Overtime:

The number of overtime hours may not exceed 80 hours a year, excluding the excess of hours worked to prevent or repair accidents and other extraordinary and urgent damages shall not be considered, without prejudice to their compensation as overtime.  
Through CBA or individual contract, a choice shall be made between payments for overtime in a set amount or payment in terms of equivalent periods of paid rest. In the absence of agreement in this respect, it shall be understood that overtime done shall be compensated through rest within the four months following its execution

Complementary/Additional Hours:

In the case of part-time workers, instead of overtime, complementary or additional hours are used.

Working Hours:

An ordinary working week is 40 hours. The actual number of ordinary working hours may not exceed 9 hours daily unless another distribution of daily working time is established by collective bargaining or by individual agreement. Workers, less than 18 years of age may not work more than 8 actual hours a day.

Sick leave:

Sick leaves are of two types – leaves due to common contingencies and leaves due to professional contingencies.

(a) Sick leave due to common contingencies (common illness or non-labor accident/work-related injury):

  • During the first 3 days: 0%*3 days*Base Regulatory (BR)
  • From day 4 to day 15: 60%*12 days*BR
  • From day 15 to day 20: 60%*5 days*BR
  • From day 21 onwards: 75%*(Actual no. of sick leave - 20 days)*BR

(b)  Sick leave due to professional contingencies (professional illness/labor accident/work-related injury: 75%* no. of days of sick leave* BR 

Maternity & Paternity Leave:

From 2021, both the parents can enjoy the full 16-week leave post-childbirth or adoption, however, such leave isn’t transferable between them.
The leave will be split into two parts:

  • With the first 6 weeks being mandatory and full time, this is to be taken by both the parents from the day of birth. The biological mother may anticipate this period up to 4 weeks before the expected date of delivery.
  • The remaining 10 weeks can then be taken as desired within the 12 months following the birth or resolution in the case of an adoption.

The leave may also be increased by one week for each child and each of the parents in the event of a disability or in the event of multiple births, adoption, or foster care.
If there is a premature birth or hospitalization is required for more than 7 days, leave may be extended for a further 13 weeks.

Severance Pay:

If employees are dismissed, they are entitled to 20 days’ salary for each year worked, up to a maximum of 12 monthly payments. This entitlement to severance pays also applies if an employee does not consent to have his/her employment contract significantly altered, or if he/she doesn’t consent to a long-term change of job location. Amount of Severance Pay also depends upon the following circumstances that can be altered as per the CBA or individual contract:

  • Termination of the Contract due to reasons (Article 49 of Worker’s statute (WS))
  • If the Company is extinguished,  
  • Geographic Mobility (Article 40 of WS)
  • When the Company implements a substantial modification of the employees working conditions (Article 41 of WS) 
  • Temporary contracts (Article 49.1.c of WS). 
  • Mass dismissal (Article 51 of WS)  
  • Contract Extinction for Objective Reasons (Article 52 of WS)
  • Extinction by the will of the worker (Article 50 of WS)

In addition to the above, amount of severance pay shall vary under following circumstances:

  • Unfair Dismissal: if dismissal is unfair “improcedente”, 33 days’ salary is considered instead of 20 days with a maximum of 24 monthly payments. Also, if contract was formalized prior to Feb. 12, 2012, instead of 33 days, 45 days need to be considered for service prior to Feb. 2012 and thereafter, 33 days need to be considered,
  • - Disciplinary dismiss: No compensation is required to be paid.

Statutory Payroll Reports
Statutory payroll reports required in Spain are:

  • Withholding tax files like Modelo 111, 216,190 and 296
  • Social Security & labor law communication like CRA, base file, etc.
  • Monthly payslip (Hoja de Salario)
  • Annual withholding tax certificate (Certificado Renta)

In Spain, Income Tax Authority, as well as Social Security Authority, provide an easily accessible platform to communicate the reports and other requirements using respective credentials like: Cret@, Sistema Red Directo, Sistema Delt@, Certific@, Sistema RED/SILTRA, etc.
Cret@: It is the new Direct Settlement System, created to simplify compliance with social security obligations, making the settlement and calculation of social security contributions easier and faster. The new method will replace the current system of self-assessment and is like the drafts of income tax that AEAT sends to the taxpayers.
Sistema Delt@: Electronic Filing System of Work Accidents.
Sistema RED: It is an online Social Security transmission system for registering any relevant events with the Social Security, such as – Joiners Leavers, Working Time, Absences, Unpaid Leaves, Changes of categories, etc. The system includes SILTRA, a recently updated system for Social Security Contributions Settlement.
Sistema Red Directo: RED Direct is the current transmission mode within the RED that is intended to help small and medium-sized companies meet their obligations with Social Security over the Internet, using a real-time, direct connection to the TGSS.

Conclusion
Spain is a lucrative business destination no doubt – but the employment and taxation laws are complex enough to require in-depth knowledge. Enforcement of new laws like the Royal Decree-Law requires organizations to draw up an Equality Plan by March 2022. Payroll leaders thus need to stay updated about emerging regulations and restructure their payroll where necessary. The most optimum way to achieve this is by partnering with a global payroll provider that has the experience of designing and delivering a comprehensive payroll solution that is fine-tuned to the nuances of payroll requirements in Spain.
Ramco Global Payroll is an award-winning solution that provides an Artificial Intelligence and Machine Learning layer to the automation process, making the whole payroll process smooth. With emerging statutory compliances, there is a dire need for payroll operation’s smart automation to adapt quickly to the dynamic regulatory environment.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice.

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