Tax obligations of a Community of Goods

One of the most significant decisions when starting a company is deciding on the legal structure it will take. This decision will have an impact on a series of tax and accounting obligations that will vary depending on the structure chosen. In this post, we will dive deeper into the case of communities of goods, enabling you to have a better understanding of what they are, their establishment and the tax obligations associated with them.

What is a community of goods?

A community of goods is an association between two or more people who hold joint ownership over a tangible or intangible asset, from which they obtain or expect to obtain a benefit as a result of carrying out an activity

Advantages of a community of goods

Setting up a community of goods is an appropriate choice for small businesses with multiple partners, as it offers the following benefits:

• No initial capital is needed to form the community of goods.
• The registration process is straightforward, enabling the activity to commence promptly.
• They are exempt from paying Corporate Tax, instead, they pay Income Tax (IRPF) under the income attribution regime.

Process for establishing a community of goods in Spain

If your planning on establishing a community of goods, you will need to follow these steps:

1. Sign a constitution agreement, which can be public or private. It is advisable to formalize the agreement in the public deed to ensure greater commitment from the partners, and to have a Notary attest to the existence of the community of goods.
2. Obtain a tax identification number (NIF) from the Tax Agency.
3. Pay the corresponding Transfer Tax and Stamp Duty (ITP and AJD).
4. Register the community of goods in the Economic Activities Tax (IAE).

In addition to the above, each partner will need to register as self-employed workers, and if workers are hired, a Social Security Code will need to be requested. Moreover, if the community of goods carries out its activity in a physical location, the according license will need to be obtained.

Tax obligations of a community of goods

A community of goods has a set of tax obligations that must be fulfilled in order to comply with Spanish tax regulations. These obligations include:

• Filing of Form 111 (quarterly) and Form 190 (annually) to report withholdings on payments made to professionals.
• Filing of Form 115 (quarterly) and Form 180 (annually) in case of having a rental contract.
• Filing of Form 184 to inform the Tax Agency about the income earned by each partner under the income attribution regime.
• Filing of Form 123 to report the withholding tax on capital income for partners who do not contribute to the community’s activity.
• Submitting the quarterly VAT return using Form 303 and the annual VAT return using Form 390.
• Filing of Form 130 quarterly and Form 131 annually if the partners of the community of goods are taxed through the simplified tax system based on the activity carried out.

How to invoice VAT as a community of goods?

Imagine the following scenario: two people, owners of a commercial property that they rent out, have acted in the following way with rental invoices and income tax declaration:

• One of the owners has issued monthly invoices in their name and has submitted the VAT declarations to the tax agency.

The two property owners have attributed 50% of the rental income in their income tax declaration.

This way of operating is incorrect since there is a community of goods over the property with two owners. In the case we have detailed, the community of goods itself should issue the invoices and declare the VAT as a separate entity from the partners.

In order to proceed correctly, the owners of the community of goods must request a tax identification number (NIF) from the tax agency and declare the income they receive from the rental as real estate capital income in proportion to their share in the community of goods.

Deductible expenses in a community of goods

Referring to the case we examined in the previous section, there may be VAT-related expenses incurred by the community of goods in connection with its activities. In order for those expenses to be deductible, it´s necessary to request an invoice from each supplier in the name of the community of goods and with its NIF.

One of the most frequently asked questions in the case of self-employed individuals who have established a community of goods, is whether it is possible to deduct the social security contributions paid as an expense of said community. The answer is that this expense cannot be attributed to the community, but it can be deducted from the net income attributed to each partner.

If you´re looking to start a business and establish a community of goods, we highly recommend seeking assistance from a professional business consultancy. They can guide you through all the necessary procedures, helping you to get your business up and running as quickly and efficiently as possible, while also minimizing the risk of mistakes.