When should you apply the 7% withholding rate to your invoice template?

When issuing invoices to companies and other self-employed workers, Personal Income Tax (IRPF) withholding must be applied at a rate of 15%. However, individuals who have registered as self-employed may benefit from a 7% withholding rate during their first two years, provided that a number of conditions are met.

What is the reduced 7% IRPF rate?

One of the items that must never be missing from any invoice is IRPF withholding, provided that the client is another self-employed worker or a company. Withholding is never applied when the invoice is addressed to a private client, nor when it is an intra-Community invoice.

As we have already mentioned, the withholding rate to be applied is 15%, which is the general IRPF rate, except in the following cases: poultry farming and pig fattening, at 1%, and forestry, agricultural, and other livestock activities, at 2%. Nor does the general IRPF withholding rate apply to self-employed workers under the objective assessment system (estimación objetiva) who are registered under heading 722 (Road freight transport) or heading 755 (Moving services), since in their case they will apply 1% withholding on their invoices.

In addition, self-employed workers may apply a reduced withholding rate during the year in which they first register as self-employed and the following two full years. It is important to bear in mind that this is not three full years, but two full years plus the time remaining until the end of the year in which they register.

Requirements for applying the reduced withholding rate.

To be able to benefit from this tax relief (bonificación), the following requirements must be met:

• Not having been registered as self-employed during the previous year.

• You must inform your clients that you are applying the 7% withholding rate.

To effectively inform your clients that you are opting for the 7% rate, the communication you send them must include your identification details and the date on which you registered for the activity, so that you can prove that you meet all the requirements.

It is important not to overlook this because, if it is not done, even if clients have received the invoice showing 7%, they are obliged to withhold 15%.

When it is in your interest to apply the reduced withholding rate

It is important to stress that the IRPF reduction is not mandatory. In fact, it may not be worthwhile in every case. Indeed, if your income is high, it may not be very advisable for you to opt for this reduction.

This reduction to 7% is not the only advantage available to new self-employed workers. They also have access to the €60 Social Security flat rate for self-employed workers, which considerably reduces the contribution payment and makes it easier for new workers to start out as self-employed.

To determine whether it is really worthwhile for you, the first thing you need to know is that this reduced IRPF rate is not tax relief, but rather a reduction in the amount of money you have to pay in advance to the tax authorities on your income.

In this respect, it is indeed worthwhile for self-employed workers who have just started working and for whom, as they do not have much income in these early stages, the IRPF reduction provides greater liquidity.

However, if you are earning a lot of money and have only paid 7% in advance to the tax authorities, you will be in for a surprise when it is time to pay your taxes because, naturally, having paid little in advance to the Spanish Tax Agency (AEAT), the payment due when you file your income tax return will be much higher, precisely because you paid little in advance.

In this respect, the IRPF reduction is a great help in boosting the activity of new entrepreneurs, but if your business is successful, applying this reduction will be neither necessary nor advisable.