Treatment of permanent establishments in Spain

Multinational companies have chosen to establish a subsidiary in Spain, so it is useful to know the tax effects of these.

With the purpose of reducing the expenses generated by certain mobilizations of personnel abroad, specifically in Spain, companies have opted to set up a subsidiary in this country to perform functions such as software, marketing, or sales. 

1. Obligations in Spain

Consequently, the employee living and working in Spain will generate a set of obligations for the employer since he/she will have to register in the country and pay the corresponding social security and personal income tax withholdings. In addition, if the requirements are met, the employer will have to locate the effective address or a permanent establishment (PE) of the foreign company in Spain.  

In this regard, the Spanish Tax Agency faces the fact of having in the country the tax residence of a foreign entity based on the criterion of the seat of its effective address. However, if there is no seat of effective address in Spain, the continuous presence in the Spanish territory of employees or managers would confirm the existence of a PE in the country. 

2. What is a PE in Spain?

It is a tax figure that consists of the significant presence of a foreign organization in Spain. When its existence is proven, a part of the global profit of the organization must be attributed to it and taxed in Spain. This profit must be determined based on the transfer pricing regime.

3. Interpretation of the PEs by the Tax Agency

Although there is no Permanent Establishment in Spain, considering that the fixed place of business only performs auxiliary functions for the group or that the employee cannot sign contracts on behalf of the company based on the escape clause, the Tax Agency, and the jurisprudence have been carrying out an expansive interpretation of the concept of PE. 

Source: Diario de Mallorca 02/06/22

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