This January we have talked about the VAT on permanent establishments through our colleague Blanca Lopez (Taxation, Madrid) for the German Chamber, which publishes monthly news from the German-Spanish world and the Chamber’s activities. Each month different topics of interest are highlighted.

In its recent Resolution No. V2523-23, the Directorate General of Taxes (“DGT”) summarises the requirements to be met in order to establish the existence of a permanent establishment (“PE”) and, in particular, the requirements to be met by the activity carried out by the PE.

In this case, a UK software development company has opened an office in the territory where the tax is applied. The company plans to employ five people who will work exclusively on the development of an application to be marketed in the UK.

Based on the jurisprudence of the Court of Justice of the EU (“CJEU“), the four requirements for the existence of a PE in Spain are defined:

  1. Adequate structure in terms of human and technical resources, excluding the possibility that the mere holding of an asset in the other Member State is sufficient.
  2. Consistent organisation of work, i.e. a clear division of the work carried out into different tasks can be recognised.
  3. Permanence in time, not determined by the temporary duration of the activity, but by the intention of the entrepreneur or professional.
  4. Autonomy in the provision of services/performance of activities. It is required that the tasks performed be attributed to the PE and not to the parent company. This implies the attribution of essential elements for the development of its activity, as well as some decision-making power in the management of the administrative operations in question.

The DGT considers that the last condition, concerning autonomy in the provision of services, is not met, since the recipient of the services is not the PE itself, but the parent company, which will ultimately market the application developed. In particular, the DGT concludes that the development office in Spain is constituted with the sole function of carrying out product development activities for the British entity, but without the office having the capacity to conclude other contracts and thus channel the British company´s usual activity in Spain. The office resembles a cost centre for the development of an internal project of the consultant that will be marketed by the latter.

Therefore, the DGT concludes that, although the other conditions are met, PE status cannot be granted for VAT purposes.

Consequently, the British company will have to recover the VAT paid in accordance with the non-established procedure, as set out in Article 119bis of the VAT Act, provided that the conditions for doing so are met, including reciprocity of treatment with the State in which they are established.

This statement is interesting given that it analyses the existence of a PE for VAT purposes in a type of structure quite common nowadays, i.e., a foreign company with employees in Spain working exclusively for the parent company.

Read the original article published in the Law & Tax Newsletter of the German Chamber of Commerce for Spain.