Withholding Tax on Professional Fees: The 15% and 7% Rates Explained for Both Invoicers and Payers

If you are a freelancer invoicing other businesses, or if you hire a lawyer, a designer or an advisor, sooner or later you will run into personal income tax (IRPF) withholding on an invoice. It raises plenty of questions, both for the person being paid and for the person paying. This guide covers the essentials, with no detours.

What withholding is and when the 15% or 7% applies

Withholding is an advance payment of the professional’s income tax. The party paying the invoice does not hand over the full amount to the professional: they deduct a percentage and pay it to the tax authorities in the professional’s name. The professional then recovers it when filing their income tax return, as a payment on account.

It applies when a professional invoices for a professional activity (lawyers, architects, consultants, translators, trainers, designers, etc.) to another business, professional or company. If the client is a private individual, no withholding applies.

The standard rate is 15%. There is a reduced rate of 7% for professionals who are just starting out: it applies in the year the professional activity begins and in the following two years. To qualify, the professional must not have carried on any professional activity in the year before starting. They must also notify each client in writing that they meet this condition, so that the client can apply the reduced rate. If they don’t, the client will withhold 15%.

Keep an eye on the change of rate: once the 7% period ends, new invoices must carry the 15%, and forgetting it is costly.

An example with round numbers

A freelance designer invoices a company a base amount of €1,000. Withholding is calculated on the base, not on the VAT.

• With 15% withholding: base €1,000 + VAT €210 (21%) − withholding €150 = €1,060 payable to the professional. The client pays the €150 to the tax authorities.
• With 7% withholding: base €1,000 + VAT €210 − withholding €70 = €1,140 payable to the professional. The client pays the €70.

The invoice must show the base, the VAT, the withholding percentage and its amount separately. A common mistake is to issue the invoice without the withholding line and then try to fix it afterwards.

How it is reported: Form 111

The client who withholds must report and pay over the amount withheld using Form 111. As a general rule it is quarterly, and is filed during the first twenty calendar days of the month following the end of the quarter. Some taxpayers, such as large companies, file monthly. If the deadline falls on a non-business day, it moves to the next business day, and it is worth confirming the year’s calendar on the Tax Agency’s website.

In addition, at the end of the year an annual summary of withholdings (Form 190) is filed, which must match the sum of the year’s 111 returns. If there were no withholdings that year, there is no need to file the 111 for those periods, unless the Tax Agency has required otherwise.

The person invoicing, for their part, does not file the 111. They record the withholdings applied to them and deduct them in their income tax return or in their quarterly instalment payments (Form 130, where applicable).

What happens if the client doesn’t pay over the withholding

The party obliged to pay it over is the payer. If they withheld and did not pay it over, or if they should have withheld and did not, they are liable to the tax authorities: they will have to pay the amount with late-payment interest and may face surcharges and penalties. Moreover, these amounts can affect the deductibility of the expense if they are not properly documented.

For the professional, the problem is different. If withholding was applied to them and the invoice proves it, they can deduct it in their return even if the client never paid it over afterwards. If no withholding was applied when it should have been, the matter is more delicate, so each case should be reviewed. And to avoid disputes, the prudent course is for the invoice to reflect it correctly from the start.

Common mistakes to avoid: applying withholding to a private individual, calculating it on the total including VAT, failing to move from 7% to 15% when due, forgetting to include a professional in the 111, or filing the quarter late.

At Zythos Business we handle the accounting and taxes of freelancers and small businesses, and withholdings are part of our daily work: we check that invoices carry the correct rate, prepare the 111 and 190 on time and reconcile what was withheld with the books. That way, whether you invoice or you pay, you know your accounts with the tax authorities are in order.