Permanent establishment: when Hacienda says your company has one

A permanent establishment is a tax concept, not a corporate one. The Spanish Ley del Impuesto sobre la Renta de no Residentes (Non-Resident Income Tax Act) considers that a foreign company operates through a permanent establishment when, by any title, it has continuously or habitually available in Spain facilities or workplaces where it carries out all or part of its activity, or when it acts here through an agent authorised to contract on its behalf who habitually exercises those powers.

A branch is something else: it is a registration in the Commercial Registry, a voluntary and public act. Every branch is a permanent establishment, but not every permanent establishment is a branch. This is the point that surprises most companies: the Tax Agency (Hacienda or AEAT) can declare that you have a permanent establishment in Spain even if you have not registered anything or signed any deed, simply because the facts fit the definition.

A permanent establishment does not have its own legal personality: it is the same foreign company acting in Spain. That is why the parent company is liable, and why the tax debt does not stay in Spain when the activity ceases.

There are 2 main entry points. The first is a fixed place of business: a place of management, a branch, an office, a factory, a workshop, a warehouse, a shop, a mine or a quarry. The second is a dependent agent: a person acting on behalf of your company who has and habitually exercises powers to conclude contracts in its name.

To those 2, the construction site is added. Spanish law considers construction, installation or assembly projects lasting more than 6 months to be a permanent establishment. If your company's country has a double taxation treaty with Spain, the threshold is usually higher: article 5 of the OECD Model Convention sets it at 12 months, and this is reflected, for example, in the treaty with the United Kingdom. Each treaty sets its own, so the period must be read in the applicable text, never from memory.

The order of analysis matters. If there is a treaty, the treaty prevails: you first look at whether there is a fixed place of business within the meaning of its article 5 and then whether there is a dependent agent. If there is no treaty, the definition of the Spanish law is applied directly, which in some points is broader, for example with warehouses and shops, which it expressly mentions.

Treaties leave out a group of activities: using facilities solely for the purpose of storage, display or delivery of goods; maintaining a stock of goods solely for that purpose or for processing by another enterprise; maintaining a fixed place of business solely for purchasing goods or collecting information; and, in general, any activity of a preparatory or auxiliary character.

That list is no longer an automatic safe conduct. Spain opted for the reinforced version of the rule in the Multilateral Convention (the so-called MLI), so the exception only applies if the activity is truly auxiliary or preparatory, and not merely because it appears on the list. Furthermore, if your company or a closely related enterprise carries out complementary functions in Spain that are part of a cohesive business operation, those activities are added together: this is the anti-fragmentation rule, which already applies, for example, in the treaty with the United Kingdom.

The typical case that falls down here is the logistics warehouse that starts storing and ends up managing orders, handling returns or providing commercial support. And it is worth remembering that, without a treaty, Spanish law cites warehouses and shops as cases of permanent establishment.

A broker, a general commission agent or any other truly independent agent acting in the ordinary course of their business does not, by themselves, create a permanent establishment. Independence is the requirement, and it is not enough to call them that in the contract.

Following the BEPS project, Spain accepted without reservation the Multilateral Convention rule that targets commissionaire arrangements: when a person habitually acts in Spain and plays the principal role leading to the conclusion of contracts that the foreign company merely formalises, there is a permanent establishment even if the contract is not signed here or in the name of the company. Nor is a person considered independent if they act exclusively or almost exclusively for one or more related enterprises.

However, that reinforced rule only enters a specific treaty if both countries accepted it. The treaty between Spain and the United Kingdom, for example, retains the classic wording of the agent with powers to conclude contracts, because the MLI did not modify that section. Before accepting or rejecting a commission agent structure, you must look at the synthesised text of the treaty published by the Ministry, which shows the treaty already modified by the MLI.

They can. The Directorate General for Taxation has analysed several times the case of an employee working from Spain for a foreign company, and the analysis is always the same: if the company has a fixed place of business available in Spain through which it carries out all or part of its activity, or if that employee acts as a dependent agent, there is a permanent establishment.

The employee's private home can become that fixed place when it is in fact at the disposal of the company and the activity is carried out from there on a continuous basis, for example if the company does not provide them with any other space, assumes the costs of the one they use or presents it as its address in Spain. The fact that the home is private does not close the debate.

The risk rises significantly when that employee is a sales representative or a manager and negotiates the essential terms of contracts from Spain. A single profile with the capacity to close deals carries more weight than 10 support staff. The answer is not to prohibit teleworking, but to document functions, powers and resources before an inspection does so.

The permanent establishment is taxed on the entirety of the income attributable to it, regardless of where it is obtained, and it does so under Impuesto sobre Sociedades (Corporate Tax) rules: a general rate of 25%, offsetting of negative tax bases and the tax deductions, with its own specialities. The tax return is form 200, with form 206 as the payment or refund document, and it is filed within the 25 calendar days following the 6 months after the end of the financial year. During the year it makes instalment payments with form 202 in the first 20 days of April, October and December, it bears withholdings like a Spanish company and applies its own on payrolls and rent.

There are 2 tax base rules that usually cost money. Payments made by the establishment to the head office for royalties, interest, commissions, technical assistance services or for the use or transfer of assets or rights are not deductible. On the other hand, executive and general administrative expenses allocated by the head office are deductible, provided they appear in the accounting statements and are allocated on a continuous and rational basis.

Added to this is the supplementary tax: 19% on the income that the establishment transfers abroad, which is paid with form 210, income code 27. It is not required when the head office resides in another European Union State, except for non-cooperative jurisdictions, nor when it resides in a country with a treaty with Spain that establishes otherwise, provided there is reciprocal treatment.

All this starts earlier: the establishment needs its own tax identification number (NIF) and its census registration with form 036 prior to the start of the activity, and it must keep separate accounting. If the head office resides outside the European Union and the European Economic Area with mutual assistance, a tax representative resident in Spain must also be appointed and communicated to the Tax Agency within 2 months of the appointment. That representative is jointly and severally liable for the tax debt of the establishment, so it is not a mere formality.

The declaration of a permanent establishment does not only look forward. Hacienda can assess the non-prescribed financial years, that is, the 4 years counted from the day following the end of each filing period, with its quota, its late payment interest and the appropriate penalty, which starts at 50% of the unpaid amount and is aggravated if concealment is detected. In parallel, the formal obligations that were never fulfilled appear: census registration, separate accounting, withholdings not applied on payrolls and payments, and the possible liability of whoever signed in Spain.

The alternative is to regularise before the requirement arrives. If you file the tax returns out of time on your own initiative, the surcharge is 1% plus 1% for each complete month of delay during the first year; after 12 months, the surcharge is 15% plus late payment interest from that twelfth month. In exchange, there is no penalty. The difference between one thing and the other is usually greater than the quota itself.

Managora makes the diagnosis, decides with you whether it is appropriate to register a branch or declare the permanent establishment as it is, processes the NIF and the census registration, prepares form 200 and the instalment payments, assumes the tax representation when it is mandatory and, if necessary, orders the regularisation of the open financial years. You can see the updated amount for each service on its file.