The Community of Madrid accounts for 40.3% of the foreign companies operating in Spain. A total of 7,800 companies are located in this region and generate 109,000 million euros in sales, accounting for 50.8% of the national total. In all these cases it is common to use the subsidiary form, although it is not always the best alternative. In this article, we will analyse the tax advantages of creating a permanent establishment in Spain.
What is a permanent establishment in Spain?
According to the Tax Agency, a natural or legal person carrying out an economic activity is considered to operate through a permanent establishment in Spanish territory when, by whatever title, it has in that territory, on a continuous or habitual basis, installations or workplaces of any kind, in which it carries out all or part of its activity or acts there through an agent authorized to contract, now in the name and on behalf of the non-resident, who habitually exercises those powers.
In particular, they are permanent establishments:
- Head offices.
- Branch offices.
- Offices, factories, workshops, warehouses, shops, shops or other establishments.
- Mines, oil or gas wells, quarries, agricultural, forestry or livestock farms or any other place of exploration or extraction of natural resources.
- Construction, installation or assembly work lasting more than 6 months.
For example, a foreign company is considered to have a permanent establishment in Spain when it sets up a factory in Toledo, from which it carries out the production and marketing of its products. This is also the case, for example, of a foreign company that opens a retail shop in Madrid.
On the other hand, there is no permanent establishment if the company only has a commercial agent with no powers in Spain, or if it simply has warehouses that it uses to display or store goods, or when the representative office has no contracting powers.
The main difference between a branch and a subsidiary is that the branch has its own legal personality independent of the parent company which is abroad, whereas the subsidiary does not have its own legal personality.
Taxation of a permanent establishment
From a tax point of view, the branch and the subsidiary are subject to corporate income tax in the case of the subsidiary or to non-resident income tax in the case of the branch, at a rate of 25%, which is applied to the net profit. In this respect, the following nuances should be considered:
- The repatriation of profits from a branch to the parent company will be taxed in Spain, depending on the country of residence of the parent company. If the residence is outside the European Union, the rate of 19% will apply. If the residence is in a Member State of the European Union, the distribution of dividends will normally be exempt from taxation, and if taxed, a reduced rate will be applied depending on the double taxation agreement that exists and has been signed.
- The share in the expenses of the parent company is more easily deductible in the branch or permanent establishment.
- In the case of interest derived from loans granted by the foreign parent company to the Spanish branch, it will not be deductible from a tax point of view.
With regard to VAT and other indirect taxes, the place where the taxable event takes place must be analysed in order to determine in which country and according to which regulations this tax will be paid.
In addition to the taxation of the permanent establishment or branch, there are other aspects to be considered:
- As mentioned above, the branch does not have its own legal personality, but acts under the umbrella of the parent company.
- The representative of the branch must be a resident in Spain who will act as a proxy for all purposes, especially vis-à-vis the Tax Agency.
- In the case of the branch, there is no limit to the liability of the parent company from which it derives.
In short, setting up a permanent establishment in Spain can have advantages and disadvantages compared to a subsidiary, which is why it is necessary to carry out an exhaustive study of the case to verify what is most convenient depending on the circumstances. At LEIALTA we are experts in advising foreign companies wishing to set up in Spain through subsidiaries, branches or other types of establishments. Contact us so that we can analyse your case and propose the option that best suits your interests and needs.
