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Tax obligations when closing a business

Do you want to close your business? Sometimes companies run for a certain amount of time and then decide to end their activities due to the lack of a successor in the business direction or because of economic difficulties, among other reasons. When this happens, they must comply with certain tax obligations in order to avoid violations and penalties imposed by Hacienda, Spain’s tax authority. In this post we will tell you all you need to know about these obligations.

Why does a company cease its activity?

First, we must distinguish between the term cessation of activity, which involves the temporary suspension of a company’s activities, and the term extinction of the entity, which means the end of all types of activity. 

In the first case, the company continues to exist but is inactive, meaning it has not been dissolved or liquidated. This may happen when the partners want to avoid the expenses and procedures that come from the liquidation and dissolution of a company (such as the payment of the property transfer tax and payment of fees to the notary and commercial registrar, among other expenses). Another reason could be that the partners want to reactivate the entity in the future and offset any negative bases that the company may have had.

What tax obligations must you comply with in order to cease trading?

Companies that want to cease trading must carry out the following formalities

  • After your business has ceased trading, you must submit the census declaration (form 036) and notify the authorities of the cessation of activity within one month.
  • If your company is subject to the Business Activity Tax (IAE) because it sells more than a million euros per year, you will also have to report the cancellation of this tax by submitting form 840 within one month after ceasing trading.

Remember that you can request in writing the refund of the quota proportional to the complete quarters in which you have not carried out any activity. For example, if your company ceased trading on September 5, 2022 (during the third quarter) and you have paid the IAE for the whole year, you can claim a refund for the last quarter. 

Furthermore, after communicating that your business has ceased trading, you will also have to comply with the following obligations:

  • Even if your company is inactive, you will still need to file the Corporate Income Tax and make the installment payments related to this tax.
  • You will also need to file the periodic declarations related to the retentions your company has.
  • Besides, you will need to file the VAT declaration for the invoices issued while the company was still active.
  • Last but not least, the annual informative declarations will also need to be filed (Corporate Income Tax, Value Added Tax (VAT), Personal Income Tax withholdings and form 347, among others). 

If your company calculates the payments on account in installments and you know that the first payment after the cessation will be due, you can choose a special system in February so that you don’t have to pay if you haven’t made any profit in the year of the cessation.

Tax obligations for the following years after your business has ceased trading

After your business has ceased trading, you will still need to comply with several tax obligations:

  • You will have to file the Corporate Income Tax every year until the company’s liquidation.
  • If you pay invoices to professionals and you have to withhold, you will have to pay this withholding through a self-assessment.
  • If your company has billed over 6 million euros during the previous year, you will also have to make the fractioned payments of the Corporate Tax, even if the result of the quota to pay is zero. 

Along with the tax obligations, you will also have to comply with several accounting obligations until your company is dissolved and liquidated. Therefore, you will need to continue the bookkeeping, preparing the annual accounts and filing them every year in the Mercantile Registry. Complying with all the tax and accounting obligations is essential in order to avoid penalties. So if you have decided to cease trading with your company, it’s recommended to hire a tax consultancy that guides you through all the necessary procedures and makes sure they’re done correctly and on time.

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