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Monday February 3, 2014

Why running a business in Paradise can be sheer hell

The other day I was talking to a group of self employed expats about their experiences running small businesses in Majorca and it was as if a maelstrom had been unleashed. Of course I shouldn’t have been too surprised because for some time there’s been growing dissent and disillusionment within the expat community about the excessive red tape and high administration and national insurance costs incurred. And that’s before even tackling the thorny issue of taxation and IVA, VAT.

At a time when Spain is struggling to cope with its 5.9 million unemployed, an estimated three million souls are valiantly trying to carve a living as autónomos, sole traders, and are finding it tough going. Once an application is processed by the tax office, the hapless would-be entrepreneur is required to sign up with SEPE, the Spanish social security system and before earning a bean, must contribute €256 per month in national insurance payments. This figure is a constant regardless of earning potential and only those below the age of 30 are offered any kind of incentives or reduction. Meanwhile in the UK, just €13 is required per month and a much more user friendly system is in place for those setting up a business which is probably why a record 150,000 chose to become self-employed in the last quarter.
Since 2008 Spain has stubbornly ignored the fact that nigh on 220 citizens per day – 400,000 in total – have relinquished their self-employed status. In the last quarter of 2013, 51,000 sole traders gave up the ghost and can one really blame them? According to self-employed Sarah Kenyon who runs a successful holiday rentals agency in the north west of Majorca, setting up a business in Spain is not for the faint-hearted. She estimates that in the past 12 years she has contributed as much as €36,000 in national insurance to the Spanish government. By contrast if she had set up her business in the UK, the cost of social security would only have been in the region of 1,800€.

Sarah Kenyon takes a dim view of the current system. ‘To be honest there’s little or no incentive for Spaniards or expat residents to go self-employed in Spain. Aside from the exorbitant fixed monthly national security cost associated with going autónomo, one has to hire a gestor, local accountant, to manage the fiscal side of the business – another estimated €50 per month – and that’s all before tax. With the current state of the economy many small businesses are going to the wall and the Spanish government is seemingly doing nothing to help.’

Local island expat newspaper, Majorca Daily Bulletin, recently reported how long established British resident Chrissy Perry had set up a medical online information service and found herself swamped by bureaucracy and red tape. In addition to her monthly social security contribution, the complex nature of her business required her to hire an accountant at a cost of 3,500€ per year in order to file her tax returns. Heaped on top were her rent, telephone bill and staffing costs. She was quoted as saying ‘it is an outrageous situation. I could have formed the company in Britain for a fraction of the cost but my family and home are in Majorca.’

One of my self-employed Majorcan friends shrugged cynically when I asked for her view on the situation. ‘Now you know why Spain has such a thriving black economy,’ she winked. ‘But look on the bright side. If you think starting a business is bad enough, just wait until you have to shut it down. That’s when the real nightmare begins.’

Please feel free to comment on this article. All comments are moderated, so it will appear after I have checked it. Thanks!

  1. Hi,

    You responded to an email my partner ‘Ed Hathaway ‘ sent this week. We both found it very informative, thanks so much. I have had a clinic in North Manchester for 7 years doing non surgical cosmetic procedures, including IPL hair removal, skin rejuvenation, peels, needling, thread veins, sun damage etc. I would be very interested in setting up in Mallorca. So far my research does not show very much competition. I would be bringing the latest technology machine which can be used on a tanned skin. Do you think this is a viable business.

    Thanks for any info


    * by Vicky | Feb 14, 01:50 pm

  2. Hello Anna,

    Couldn’t agree more with you about this issue. Actually, I felt so strongly about how unclear the system was that I started my own blog in order to try to demystify some of its quirks (see address that my name links to).

    However, what with crisis-struck businesses trying to reduce the costs of hiring (as well as a few who just take advantage), the number of autónomos has reached record levels this year. So hopefully this will help influence the situation!

    * by Penelope | Feb 15, 09:22 pm