LEGAL FORMULAS FOR INVESTMENT IN SPAIN

A few days ago a lawyer and business advisor told me that some foreign investors had contacted him because they wanted to operate in Spain, carrying out their usual activities here.

Because of the trust he has with me, he asked me, Do we set up a branch or a subsidiary?. My response was almost instantaneous and instinctive, and I opted for the subsidiary.

From the turns that I have been giving to my head in recent days, these lines derive, with which I introduce myself into a fairly broad topic, such as that related to legal formulas, available to investors (more specifically companies) that They wish to establish themselves or open new businesses in Spanish territory.

The formulas, due to their degree of complexity, are:

a.- The permanent establishment.

b.- The branch

c.- The constitution of a Spanish company (subsidiary) or as a variant of this formula, the purchase of a previously constituted company.

However, this enumeration is not exhaustive, and other types of figures, associative or not, would fit. Likewise, despite the fact that I will refer to foreign entities, I do not do so in a technical sense, since the most correct terminology is to speak of non-resident entities in Spain.

A.- The permanent establishment.

The permanent establishment is the easiest way to carry out a business activity in Spain, as it simply consists of the direct carrying out of activities in Spain by the foreign company, without the creation of any new entity. Therefore, it is the foreign entity that assumes all liability derived from the actions of the permanent establishment.

In the case of foreign companies duly constituted in an EU Member State, they can automatically operate in Spain, without the need for further permits, as a consequence of the principles of free movement of goods, people, services and capital, unless there are certain administrative controls to the activity.

Faced with the risk that the benefits (rperformance in tax terminology) that may generate this economic activity are not taxed by the Spanish Treasury, the tax regulations create the concept of permanent establishment.

a´) Concept of permanent establishment.

Specifically, article 13 of Royal Legislative Decree 5/2004, of March 5, which approves the Consolidated Text of the Non-Resident Income Tax Law, tells us that:

The following are considered income obtained in Spanish territory: 

 Income from economic activities or exploitations carried out through a permanent establishment located in Spanish territory.

It will be understood that a natural person or entity operates through a permanent establishment in Spanish territory when, for whatever reason, it has, on a continuous or habitual basis, facilities or workplaces of any kind, in which it carries out all or part of its activity, or acts in it through an agent authorized to contract, in the name and on behalf of the taxpayer, who regularly exercises said powers.

In particular, it shall be understood that the headquarters, branches, offices, factories, workshops, warehouses, shops or other establishments, mines, oil or gas wells, quarries, exploitations, constitute a permanent establishment. agricultural, forestry or livestock or any other place of exploration or extraction of natural resources, and construction, installation or assembly works whose duration exceeds six months.

The fact that the income of the permanent establishments of non-resident entities is taxed in Spain may give rise to the existence of double taxation, since said profits, in principle, should also be taxed in the territory where the company is located. non-resident foreigner in Spain.

For this reason, double taxation agreements (CDIS) signed by Spain must be taken into account, and they may have a concept of permanent establishment different from that included in article 13 LIRNR, which may be of greater or lesser length.

According to the information provided by the Tax Agency, 103 agreements are currently signed to avoid double taxation, with 94 being in force. The other 9 are in different stages of processing (​Azerbaijan, Bahrain, Belarus, Cape Verde, Montenegro, Namibia , Peru and Syria). In addition, the DCIS have been renegotiated with Austria, Belgium, Canada, the United States, Finland, India, Mexico, the United Kingdom and Romania.

As an example of how these double taxation agreements work, it should be mentioned that in the case of permanent establishments abroad of companies resident in Spain, article 22 of the Corporation Tax Law declares that the positive income obtained in the foreigner through a permanent establishment located outside Spanish territory when it has been subject and not exempt to a tax of an identical or analogous nature to this Tax with a nominal rate of at least 10 percent, under the terms of the paragraph 1 of the previous article.

And as an anecdote, I will point out that some populist political parties are looking at these incomes

a´) Positive delimitation of the permanent establishment.

Since the permanent establishment is a concept of a fiscal nature, it will be necessary to comply with what the tax regulations say about them, and thus it should be noted:

1.- You must request the tax identification number "NIF",

2.- They are obliged to keep separate accounts as well as comply with other obligations of an accounting, registry or formal nature to which the taxpayers of Corporation Tax are obliged.

3.- You must designate a natural or legal person to represent you before the tax administration.

b´) Negative delimitation of the permanent establishment. 

1.- As the permanent establishment is not a subject that can be registered in the Mercantile Registry, it does not require a public deed for its constitution, nor registry registration, nor the formulation and deposit of annual accounts.

2.-It does not require its own administrative body, the administration being the same pre-existing in the foreign entity, although it is highly recommended that the people who manage the establishment have the corresponding powers.

3.- It does not have its own responsibility, which remains entirely that of the foreign entity.

c´) Taxation

In general, the tax base of permanent establishments will be determined in accordance with the provisions of the general regime of Corporation Tax and will be applied, with the limitations established by law, the type of tax that corresponds among those provided for in the regulations. of the Corporate Tax.

B.- The Branch 

If we said that the permanent establishment was a fiscal concept, in the case of the branch we are essentially in a registration concept, since the only legal reference to it, except for any European directive, we have it in article 295 of the Regulation of the Mercantile Registry, which establishes a concept of the same for the purpose of determining the requirements to access the Mercantile Registry, and subsequent acts related to it.

This article 295 RRM says: For the purposes of the provisions of this Regulation, a branch shall be understood as any secondary establishment endowed with permanent representation and certain management autonomy, through which the activities of the company are carried out, in whole or in part.

a´) Positive delimitation of the branch.

1.- It is constituted by public deed and must be registered in the Mercantile Registry.

2.- As with the permanent establishment, you must request a tax identification number "NIF".

3.- It must have a legal representative empowered to manage its affairs, but there are no formal administration or management bodies

4.- It is obliged to keep separate accounts as well as comply with other obligations of an accounting, registry or formal nature to which the taxpayers of Corporation Tax are obliged.

5.- You have the obligation to formulate and deposit annual accounts.

b´) Negative delimitation of the branch. 

Just as the permanent establishment does not have its own responsibility, which remains entirely that of the foreign entity.

c´) Taxation.

In the same way that happens with permanent establishments, the tax base of the branch will be determined in accordance with the provisions of the general regime of Corporation Tax and will be applied, with the limitations established by law, the type of tax that corresponds from among the provided for in the Corporate Tax regulations.

C.- The Subsidiary.

The subsidiary, unlike the permanent establishment and the branch, is a new company incorporated in Spain, different from the foreign entity and, therefore, with its own independent legal personality, which may have a corporate purpose equal to that of the foreign entity, similar.

The delimitation of the subsidiary is articulated through the elimination of the negative notes that we have indicated for permanent establishments and branches. Thus it presents as characteristic notes.

1.- It is constituted by public deed and must be registered in the Mercantile Registry.

2.- You must request a tax identification number "NIF".

3.- You must designate an administrative body and there is a Board of Partners.

4.- It is obliged to keep accounts as well as comply with other obligations of an accounting, registry or formal nature that are typical of the taxpayers of Corporation Tax.

5.- You have the obligation to formulate and deposit annual accounts.

6.- He has his own responsibility.

Regarding the possible liability of the parent company for the obligations of the subsidiary, I would just like to point out that this issue of the derivation of liability is one of the star issues at the moment in company law, with regulations, at a European level, that admit it and others who reject it. At the national level and pending regulation of groups of companies, we have a sentence (STS 695/2015 of December 11) that is aimed at recognizing the group interest.

7.- Taxed separately for corporation tax

As a summary, I highlight this table, drawn up by Àlex Plana Paluzie and published in Economists&Jurist

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