If There Is a Permanent Establishment: What It Involves in Spain

The steps

1. Establish the facts and the start date. A permanent establishment exists from when the business begins to be carried on through the place, not from when someone notices. The start date decides how many years are open.
2. Register with the tax agency. The company obtains a Spanish tax number and files the census declaration for a permanent establishment, with its activity and address.
3. Determine the attributable profit. A functional analysis identifies what the permanent establishment does, with what assets and risks, and what an independent business would earn for it.
4. Set up separate accounts. The permanent establishment keeps its own books, in line with Spanish accounting rules, for the operations and assets attributed to it.
5. File the returns for the open years. Annual returns for each year not yet time-barred, with late-filing surcharges if done voluntarily.
6. Put recurring compliance in place. Annual return, instalments, withholding returns and, where relevant, VAT.
7. Claim relief at home. The home country exempts the profit or credits the Spanish tax, under the treaty.

How much profit, and how much tax

A permanent establishment is taxed in Spain under the non-resident income tax at the general corporate rate, currently 25 %, on the profit attributable to it. It is not taxed on the company's worldwide profit, nor on its Spanish sales as such.

Attribution follows Article 7 of the applicable treaty: the permanent establishment is treated as if it were a separate and independent enterprise performing the same functions. For a single remote employee, the result depends entirely on what that employee does.

The figures are illustrations of method, not benchmarks. The point is that the tax itself is often moderate, and that the outcome is driven by the functional analysis.

What is usually more expensive than the tax

• Compliance. Accounts, an annual return, instalment payments and withholding returns, every year, for what may be one employee.
• Past years. The tax agency can assess four years back. Filing voluntarily before any enquiry attracts a surcharge that grows with the delay. An assessment after an audit carries interest and penalties that are generally set between 50 % and 150 % of the unpaid tax.
• Double taxation in practice. Relief at home depends on the home country accepting that a permanent establishment exists and agreeing on the profit. If it does not, the remedy is a mutual agreement procedure between the two administrations.
• Knock-on effects. A permanent establishment is a withholding agent in Spain. Remuneration borne by it affects where employees who travel to Spain are taxed. And costs charged to it by head office have to be supportable.

VAT is a different question

A permanent establishment for income tax is not automatically a fixed establishment for VAT. The VAT concept requires a sufficient degree of permanence and a suitable structure of human and technical resources to supply or receive services independently. European case law has been restrictive on finding a fixed establishment from a single home worker. The two analyses share facts but not conclusions, and each has to be done.

Recognise it, or restructure?

Where the facts point to a permanent establishment, a company has three broad choices:

• Register the permanent establishment and comply. It keeps the existing employment relationship and is proportionate when there are one or two people.
• Set up a Spanish subsidiary that employs the staff and is rewarded for its functions by the parent. More formality at the outset, a cleaner separation afterwards, and often preferable as headcount grows.
• Change the facts. Move client-facing work elsewhere, change the working pattern or relocate the role. This only helps if the change is real, and it does nothing for past years.

The tests that lead to the conclusion are in the main guide. Payroll and social security, which apply with or without a permanent establishment, are in employer obligations without a permanent establishment. For past years, see voluntary disclosure.