Spanish Permanent Establishment Tax Regulations

Non-Resident Permanent Establishments in Spain

The notion of a permanent establishment (PE) or group includes three primary assumptions:

• Work Center: A work center is located in Spanish territory. It should be emphasized that the permanent establishment has no legal personality, unlike a subsidiary belonging to a parent (which would be a Group of Companies) which does have legal personality.
• Authorized Agent: An agent authorized to contract on behalf of a "headquarters" and acting on Spanish territory.
• Construction Projects: A work of mounting or construction exceeding 6 months (which is more specific and rare).

Structure of Taxation for PEs

Regarding the structure of taxation, we can establish that:

1. All income attributable to the permanent establishment should be computed in its tax base, regardless of the place of production.
2. Taxation is synthetic, meaning it does not distinguish between different classes of income.
3. It follows a year in response to the financial year.

Determining the Tax Base

To determine the tax base, as a general rule, the same rules as in Corporate Income Tax (IS) are followed. While a reasonable deduction for the management costs of the "headquarters" may be practiced, no deduction is allowed for fees, interest, or royalties paid by the permanent establishment to its "headquarters."

Tax Rates and Credits

The tax rate is 30%, and there is a complementary type (branch tax) applicable in the case of transferring the earned income abroad. For the fee payable, the same tax credits available in the Corporate Income Tax (IS) apply.

Payment and Filing Obligations

The permanent establishment must make installment payments under the same rules as the Corporate Income Tax (IS). You must file a return within 25 days to 6 months after the date of accrual. The accrual date is the last day of the financial year.

Disclosure and Accounting Requirements

With respect to disclosure obligations, the entity must keep separate accounts using the same rules as resident entities.

Identifying the Taxpayer

Who is the taxpayer? The taxpayer is the parent entity.

Example: "FARMA-SPAIN," a permanent establishment in Valencia, is dependent on "American Pharmacy" based in Chicago, USA ("headquarters"). Who is the taxpayer for the income earned by that permanent establishment in Spain?

Solution: The permanent establishment lacks legal personality, so it is considered part of the "headquarters" to which it belongs. The taxpayer will be "American Pharmacy."

Tax Consolidation Regimes

In the case where a permanent establishment plays the role of parent or head of several subsidiaries resident in Spain [Article 67.2.a) and f) TRLIS], the tax consolidation regime governs, and the entity will be taxable within the Corporate Income Tax (IS) group.

Example: Following the previous case, the permanent establishment "FARMA-SPAIN" acts as the "parent" of other permanent establishments of "American Pharmacy" in Spain, such as "FARMA-SEVILLA," "HOME-mother," and "CACERES-Nature."

Solution: The taxpayer will be the designated entity within the Corporate Income Tax (IS) group.