Income Through Foreign LLC in Spain

The limited liability company familiar to U.S. taxpayers does not map neatly onto Spanish categories. In Spain, some entities are taxpayers in their own right and others are transparent conduits. For residents with a foreign LLC, the central question is whether Spain treats the LLC as transparent so the member is taxed directly, or as an opaque company such that only distributions are taxed. The answer depends on the LLC’s legal features, governance, and how it is taxed in its home jurisdiction. That classification then drives the rules on income character, the risk of a permanent establishment in Spain, social security and indirect tax exposure, and how treaty benefits apply.

Transparency Versus Opacity Under Spanish Characterisation

Spain does not blindly adopt the foreign label. It looks at the foreign law features: Is there legal personality distinct from the members? Are profits automatically allocated, or can they be accumulated at the entity level? Can members transfer interests freely? Are managers separate from owners? Spain then compares those traits with domestic forms. A typical U.S. LLC that elects pass-through status for U.S. tax and allows contractual flexibility often lands closer to a partnership for Spanish purposes, leading to transparency. However, an LLC that accumulates profits and behaves like a corporation can be treated as opaque. This characterisation is factual and must be documented with articles, operating agreements, and evidence of how the entity actually operates.

Taxation Of The Spanish-Resident Member When Transparent

If Spain treats the foreign LLC as transparent, a Spanish resident member recognises their share of the LLC’s profits annually, even if no distribution is made. The profits must be re-classified under Spanish categories. Active business profits are taxed as self-employment income and require registration for Spanish bookkeeping and advance payments. Dividends, interest, royalties, and capital gains keep their nature and are taxed at savings rates. Where several streams coexist inside the LLC, separate tracking is essential to preserve character and foreign tax credit relief.

When The LLC Is Opaque For Spain

If Spain sees the foreign LLC as an opaque company, the Spanish resident member is generally taxed only when the LLC pays a dividend or the member disposes of their interest, subject to savings income rules. But opacity does not eliminate anti-avoidance. If the LLC sits in a low-tax jurisdiction and derives mainly passive income, Spain can apply look-through rules to attribute certain categories of income even without a distribution. Additionally, if the member effectively performs the LLC’s core business from Spain, the permanent establishment analysis can shift profits to Spain notwithstanding the entity’s opacity.

Permanent Establishment Risk

Where the LLC carries on business and significant decision-making or service delivery occurs in Spain, the tax authorities can assert that the LLC has a permanent establishment in Spain. That can be the case even if the LLC is incorporated abroad. The practical triggers include a fixed place of business in Spain, employees or dependent agents here, or management and control effectively exercised from Spain. If a permanent establishment exists, an allocation of profits becomes taxable in Spain at corporate tax rates for the PE, with transfer-pricing style documentation needed to support the attribution.

Social Security And VAT Considerations

When a Spanish resident member actively works in the LLC’s business, Spanish social security can apply to the individual depending on the work patterns and European or bilateral coordination rules. For services supplied from Spain, Spanish VAT may be due depending on where the client is located and the place-of-supply rules. Even if the LLC is foreign, regular service provision from Spain can create VAT registration obligations here. These regimes run in parallel with income tax, so an early compliance map avoids painful corrections.

Treaty Relief And Foreign Tax Credits

Double tax treaties reduce economic double taxation but only if the same person is considered the beneficial owner in both countries. For transparent entities, the treaty entitlement normally sits with the member, not the entity. For opaque entities, entitlement may sit with the LLC. Spain grants foreign tax credit to the Spanish taxpayer of record up to the Spanish tax on the same income. Without careful alignment and documentation—particularly for U.S. withholding on dividends or services—credit can be denied.

Recordkeeping And Evidence

The decisive factor in most audits is the paper trail. Keep the LLC’s charter, operating agreement, member resolutions, tax classification elections, and financial statements. Maintain a schedule showing annual profit allocation, the Spanish character of each item, foreign taxes withheld, and actual cash distributions. For active businesses, keep invoices, contracts, time records, and proof of where services were performed. This evidence supports your Spanish filings and your treaty claims.

Planning For New Arrivals And Existing Residents

If you are moving to Spain and own an LLC, review your structure before you arrive. In some cases, converting to a corporation abroad reduces Spanish transparency risk if deferral is important. In other cases, embracing transparency and aligning your Spanish registrations, accounting, and estimated payments creates simplicity and reduces audit risk. If multiple members live in different countries, consider a written profit-splitting methodology and transfer-pricing style support for intercompany service fees. Where family members are passive, a clear distinction between active remuneration and investment return helps avoid reclassification.

Conclusion

Foreign LLCs and Spanish tax can work smoothly with the right classification, records, and compliance. The mistake is assuming that a foreign label will control in Spain or that distributions alone are taxable. Test your facts, document your governance, map your PE and VAT risks, and coordinate foreign tax credits. The goal is sustainable, predictable taxation for your business and your family. For bespoke advice and defence in an audit, engage a tax lawyer in Spain familiar with cross-border LLCs.