Should I Remove My S-Corp Status When Moving to Spain?

This is one of the most common — and most misunderstood — questions I get from U.S. founders, freelancers, and digital nomads planning a move to Spain.

Short answer: yes, in most cases keeping an S-Corporation after becoming Spanish tax resident creates more problems than benefits.

Long answer: the issue is not that S-Corps are “bad”, but that Spain does not recognize what makes them useful — while many of the perceived disadvantages can be addressed in other, more efficient ways.

Let’s break it down properly.

1. Why the S-Corporation is so attractive in the U.S.

From a U.S. perspective, the S-Corporation is one of the most elegant tax vehicles ever created:

a hybrid structure combining corporate form with pass-through taxation.

Its main advantages include:

• The ability to split income between salary and profits

• Avoiding self-employment taxes on distributions

• Access to retirement plans (401(k))

• Deductibility of health insurance

• No corporate-level tax on retained earnings

If Spain had an equivalent figure, it would be an extraordinary planning tool.

Unfortunately, Spanish tax law does not recognize anything remotely comparable.

2. The real problem: Spain does not recognize the benefits of the S-Corp

The core issue is not whether the S-Corporation is transparent — but what Spain does with that transparency.

As consolidated in Binding Resolution DGT V2108-20 (February 6, 2020), a foreign entity will be treated as transparent if:

• It is not subject to corporate income tax in its country of incorporation

• Its income is fiscally attributed to its shareholders under foreign law

• The income retains its underlying nature when attributed

U.S. S-Corporations meet these requirements.

However — and this is crucial — being treated as transparent is not the same as being recognized as a hybrid vehicle.

Spain may treat the S-Corp as transparent, but it does not preserve the U.S. tax advantages attached to it. This treatment is functional and limited to income attribution purposes, not a recognition of the S-Corporation as a distinct hybrid tax vehicle.

3. Transparency does not preserve income classification

Many taxpayers assume that if Spain accepts transparency:

• K-1 income will be treated as investment income

• Salary will remain salary

That assumption is incorrect.

In most real-world S-Corp structures, the shareholder:

• Controls the entity

• Performs the work

• Bears the economic risk

• Makes all relevant decisions

Under Article 27 of the Spanish Personal Income Tax Law (LIRPF), this is the textbook definition of economic activity carried out directly by an individual.

Spanish tax authorities therefore apply:

• The principle of economic reality (Article 13 Spanish Tax Law)

• Anti-avoidance doctrines preventing artificial income splitting

As a result:

• K-1 distributions are not treated as dividends

• A W-2 salary does not prevent recharacterization

All net income is treated as:

Income from economic activities (rendimientos de actividades económicas)

In practice, this means that all profits are ultimately attributed to the shareholder and taxed as income from economic activities, often pushing the taxpayer into the highest progressive tax brackets applicable to such income.

4. The overlooked reality: many S-Corp “benefits” can be achieved differently

Here is the part most people miss.

The main reason people cling to S-Corps is to avoid U.S. self-employment taxes.

But once you become:

• Spanish tax resident, and

• Registered in Spanish Social Security

You are covered by the U.S.–Spain Social Security Totalization Agreement.

Practical consequence:

• You contribute only to Spanish Social Security

• You do not pay U.S. self-employment taxes

The U.S. 15.3% SE tax disappears

Spanish Social Security contributions:

• Start at around €90/month in the first year

• Increase progressively

• Are often far lower than U.S. SE tax

• Include public healthcare and social protection

In other words:

one of the main reasons to keep an S-Corp becomes irrelevant once you are properly structured in Spain.

5. The real planning objective: real separation, not pass-through

For Spanish tax residents, an S-Corporation:

• Does not preserve income separation

• Does not deliver its intended tax benefits

• Adds complexity and audit risk

The real objective becomes:

Creating a structure that Spain recognizes as genuinely separate from the individual.

In practice, this often means:

• Abandoning S-Corp status

• Using a non-transparent entity (e.g. a C-Corporation)

• Or restructuring entirely under Spanish law

Always taking into account:

• Tax residency

• Immigration status

• Social Security coverage

6. Final takeaway

The S-Corporation is a brilliant U.S. invention.

Spain simply does not have the legal architecture to accommodate it.

As long as Spanish tax law remains anchored to substance, economic reality, and personal activity, S-Corps will continue to collapse once Spanish tax residency is acquired — no matter how carefully they are maintained in the U.S.

The solution is not forcing the S-Corp to work in Spain.

The solution is designing a structure that works under Spanish law — and using international agreements intelligently to neutralize the real downsides.