Remote work and global mobility are causing headaches for organisations’ financial and labour department. For personal or professional reasons, companies are either relocating certain employees abroad (i.e. to Spain) or hiring them directly in Spain. They can perform all kinds of tasks, from sales and marketing functions to software development or managing departments or companies, to name a few examples.
In order to save on structural or administrative costs in the situations described above, organisations often choose to set up a subsidiary or branch in Spain.
The employee or manager who lives and works in Spain (a different country from their employer) may generate, from a tax and labour point of view, a series of obligations in Spain for the employer, to the extent that the employer is obliged to register in Spain and pay the corresponding social security and personal income tax withholdings. Moreover, depending on the employee’s functions, the requirements may be met for locating in Spain the effective head office or a permanent establishment (PE) of the foreign entity.
At the international level, the tax residence of entities is determined according to where their effective head office is located. For instance, if the CEO or director of a German entity moves to Spain and assumes management or leadership functions in this country, it could be understood that the German entity, despite having been established in Germany and having its registered office in Germany, has its place of effective management in Spain. Should this be the case, the entity in question would be taxed in Spain with the Spanish corporate income tax for all its worldwide income.
However, bringing the tax residence of a foreign entity to Spain – based on the criterion of the place of its effective head office – can be a complex exercise for the Spanish Tax Administration.
On the other hand, even if there is no effective head office in Spain, the permanent presence in Spanish territory of certain employees or managers from the foreign entity (because they live and work wholly or partly in Spain) could determine the existence of a PE in Spanish territory.
A PE is a tax concept and, in general terms, a PE is understood to exist in Spain when the foreign organisation has a ‘significant presence’ here or, as technically speaking, when it has in Spain (i) a fixed place of business from which it carries out all or part of its activity or (ii) a dependent agent.
If the existence of the PE in Spanish territory is confirmed, part of the organisation’s global profit must be attributed to the PE and taxed in Spain, according to the rules of Non-Resident Income Tax. Nevertheless, what part of the group’s profit should be attributed to the Spanish PE? This would have to be considered from the point of view of transfer pricing, as it is necessary to analyse in detail how much value the PE in Spain contributes to the overall profit of the group.
Returning to the examples of personnel hired by a German company that, from Spain, (i) promotes sales and marketing activities, (ii) develops software for an IT group or (iii) manages a strategy team, we could argue in each case that the German entity has a permanent establishment in Spain, regardless of whether the work is carried out from the employee’s home or an office in Spain.
It could be claimed that, based on the escape clauses, there is no PE in Spain on the grounds that the fixed place of business only performs auxiliary functions for the group or that the employee does not have the power to enter into contracts on behalf of the organisation. Well, the reader should be aware that the Spanish Tax Administration and case law, unlike in other countries, have been interpreting the concept of PE in an expansive manner.
Organisations often choose to set up a subsidiary or branch in Spain to save on structural costs.
