When a foreign company decides to operate in Spain, one of the first decisions it must make is whether it should set up a subsidiary, open a branch or operate through a permanent establishment. Therefore, this choice is not merely a corporate formality: it affects taxation, asset liability, employee hiring, transfer pricing, profit repatriation and the parent company’s level of exposure.

In a city such as Barcelona, where international groups, technology companies, industrial businesses, professional services firms and cross-border structures come together, choosing the right form of establishment can prevent unnecessary tax costs and future contingencies with the Spanish Tax Agency. For this reason, analysing the Subsidiary or permanent establishment in Spain alternative from the outset makes it possible to adapt the structure to the group’s actual activity and objectives.

At MGI Àmbit, a firm of lawyers and economists based in Barcelona with national and international coverage, we advise companies and international clients on establishment processes, the creation of subsidiaries in Spain, the opening of branches, the management of permanent establishments and international tax planning. In addition, this guide explains the key differences between a subsidiary and a permanent establishment to help you make an informed decision.

In summary: a subsidiary is an independent Spanish company with its own legal personality and limited liability. A permanent establishment is the taxable presence of a foreign company in Spain, without a separate legal personality, which is taxed on the income attributable to that activity. In general, a subsidiary is more suitable for stable projects with growth ambitions; by contrast, a permanent establishment may fit more temporary or exploratory operations, although its tax management is not always simpler.

Subsidiary or permanent establishment in Spain: why this decision matters

The decision between a subsidiary and a permanent establishment determines how the company will operate in Spain from day one. In addition, it not only determines which tax return must be filed, but also who is liable to suppliers, customers, employees, public authorities and third parties.

However, many international companies make the mistake of choosing a structure based on speed or initial cost. Nevertheless, a seemingly simpler structure can create problems if turnover grows, local staff are hired, intragroup transactions arise or the parent company needs to limit its asset exposure. For this reason, the Subsidiary or permanent establishment in Spain comparison must consider the entire project, not only the incorporation cost.

A tax, corporate and operational decision

First, establishment in Spain should be analysed from three perspectives:

• Tax: which tax applies, how the taxable base is calculated, whether withholding taxes apply, how profits are repatriated and which double taxation treaty is applicable.
• Corporate: whether an independent company is formed, a branch is opened or the parent company operates directly through a local presence.
• Operational: employee hiring, invoicing, accounting, relationships with banks, tenders, suppliers and customers.

What is a subsidiary in Spain?

A subsidiary is a company incorporated in Spain and controlled by a parent company, which may be foreign or Spanish. In general, the usual structure is a Limited Liability Company (SL), although certain projects may also use a Public Limited Company (SA).

In addition, the subsidiary has its own legal personality. Specifically, this means that it has its own tax identification number (NIF), registered office, governing body, accounting records, annual accounts, tax obligations and separate asset liability.

Limited liability and separation of assets

The main advantage of a subsidiary is that it separates the assets of the parent company from those of the Spanish company. In principle, the subsidiary’s debts do not fall directly on the parent company, except in exceptional cases such as guarantees granted by the parent, commingling of assets, fraud or piercing the corporate veil. Liability may also be extended where the parent company is also the subsidiary’s director and certain circumstances arise.

For this reason, this separation is particularly valuable when the activity in Spain involves significant contracts, employees, bank financing, liability to customers, employment risks or potential litigation.

Share capital of a Spanish subsidiary

In an SL, the current legal minimum share capital is 1 euro. However, where the capital is below 3,000 euros, special rules apply: at least 20% of profits must be allocated to the legal reserve until the combined capital and reserve reach 3,000 euros, and additional liabilities may arise in the event of liquidation with insufficient assets.

For this reason, although it is possible to set up a subsidiary with 1 euro, many international companies choose to capitalise it adequately from the outset to demonstrate solvency to banks, suppliers and customers.

What is a permanent establishment in Spain?

A permanent establishment is a tax concept. It may arise when a non-resident company has a stable presence in Spain through which it carries on all or part of its economic activity. Determining whether it exists requires a careful, case-by-case analysis.

For example, a permanent establishment may exist, among other circumstances, where the foreign company has an office, place of management, branch, factory, workshop, operational warehouse, construction project or installation of a certain duration in Spain, or where it operates through a dependent agent authorised to enter into contracts on behalf of the company.

A PE has no separate legal personality

Unlike a subsidiary, a permanent establishment is not a separate company. It is the foreign company itself operating in Spain. Consequently, obligations assumed by the PE may directly expose the parent company.

From a tax perspective, the PE must pay tax in Spain on the income attributable to it. It therefore needs separate accounts and documentation that identifies which income, expenses, assets, functions and risks correspond to the Spanish activity.

Branch and permanent establishment: practical difference

A branch is a form of corporate presence of a foreign company in Spain. It is registered with the Commercial Registry and has a permanent representative. From a tax perspective, a branch will usually constitute a permanent establishment.

Therefore, a branch may be described as the corporate and registrable expression of a foreign company in Spain, while a permanent establishment is the tax consequence of operating in Spain through a stable presence. However, not every branch necessarily constitutes a permanent establishment for tax purposes, and not every permanent establishment is organised through a branch.

Tax differences between a subsidiary and a permanent establishment

The most visible tax difference is the applicable tax. A subsidiary is taxed under the Corporate Income TaxAct, while a permanent establishment is subject to the Non-Resident Income Tax Act and, where applicable, the relevant bilateral treaty, without prejudice to the fact that it must file its tax return using the same form as Corporate Income Tax taxpayers (Form 200) and within the same deadlines.

Taxation of a Spanish subsidiary

As a Spanish tax resident, the subsidiary is subject to Corporate Income Tax. Specifically, the general rate is 25%, although reduced or special rates may apply in certain circumstances, such as newly created entities, micro-enterprises or small companies, provided that the legal requirements are met.

When the subsidiary distributes dividends to the foreign parent company, withholding tax may apply in Spain. The general rate on dividends is 19%, but it can often be reduced or eliminated under a double taxation treaty or the EU Parent-Subsidiary rules, provided that the participation, holding-period and anti-abuse requirements are met.

Taxation of a permanent establishment

A permanent establishment is taxed in Spain on the income attributable to its Spanish activity. In practice, rules similar to Corporate Income Tax apply when determining the taxable base, but with specific provisions for non-residents. Because the PE and the parent company are legally identical, reduced rates are only available in very exceptional cases

The PE must file the relevant Corporate Income Tax/Non-Resident Income Tax return for a permanent establishment and make instalment payments on terms similar to resident entities. In addition, when a non-resident entity transfers PE income abroad, an additional tax of 19%may apply, unless an exemption is available under EU law or an international treaty.

Deductible expenses and dealings with the head office

In a subsidiary, payments to the parent company for management services, financing, licences or the transfer of assets may be deductible if they are genuine, necessary, properly documented and priced at market value.

In a permanent establishment, dealings with the head office require a more delicate analysis. Therefore, profit attribution is generally more complex and must reflect which functions, assets and risks genuinely belong to the PE. Certain internal payments to the head office may be subject to deductibility restrictions, making it essential to review Spanish law and the applicable double taxation treaty.

Comparison table: subsidiary vs permanent establishment in Spain

When should a subsidiary be set up in Spain?

When considering Subsidiary or permanent establishment in Spain, setting up a subsidiary is generally the most suitable option where the company expects a stable presence in Barcelona or elsewhere in Spain. In other words, where the goal is not merely to test the market, but to conduct ongoing activity, hire staff, sign significant contracts and build a strong local presence.

Common cases in which we recommend analysing a subsidiary

• International companies seeking to open a permanent office in Barcelona.
• Groups that need to hire a local team with legal certainty.
• Companies seeking to limit the parent company’s liability.
• Companies planning to obtain bank financing or grants in Spain.
• Businesses with significant turnover in the Spanish market.
• Companies seeking to operate with a stronger local image before customers and suppliers.

A subsidiary also facilitates the group’s internal organisation where medium- or long-term growth is expected. It allows results, costs, teams, responsibilities and risks to be separated by territory.

When may a permanent establishment be sufficient?

A permanent establishment or, specifically, the creation of a branch, may be suitable where the presence in Spain is limited to a specific project or an initial market phase, provided that the analysis concludes that the permanent establishment actually exists for tax purposes. However, this must be considered carefully, because it does not always involve fewer obligations.

Scenarios in which a PE may be appropriate

• Temporary installation, assembly, construction or specialised-service projects.
• Companies seeking to test the market before incorporating a Spanish company.
• Low-volume activities that do not require their own corporate structure.
• Transactions where the applicable double taxation treaty enables efficient tax management.
• Cases where the parent company wishes to retain direct control over the Spanish operation.

However, the risk lies in assuming that a PE or the creation of a branch is an informal solution. It is not. Where a permanent establishment exists, tax, accounting and documentation obligations must be met from the outset.

Risk of an unintended permanent establishment

One of the most sensitive issues in international taxation is that a foreign company may create a permanent establishment in Spain without having planned to do so. Specifically, this occurs when the actual activity exceeds the presence threshold permitted under domestic law or the applicable double taxation treaty.

Situations that may unintentionally create a PE

Among others:

• Having staff in Spain who regularly negotiate or conclude contracts.
• Using an office or fixed space from which effective commercial activity is carried on.
• Having an operational warehouse, workshop, installation or place of management in Spain.
• Carrying out construction works, installations or projects of a significant duration.
• Operating through a dependent agent capable of binding the foreign company.

For this reason, identifying this risk in time is essential. To properly address the Subsidiary or permanent establishment in Spainquestion, it is also necessary to analyse whether the current activity has already created an unintended PE. If the Spanish Tax Agency concludes that an undeclared PE existed, it may demand back taxes, interest, penalties and related-party transaction documentation.

Steps to set up a subsidiary in Spain

Setting up a subsidiary requires the coordination of corporate, tax, notarial and banking procedures. Where the shareholder is a foreign company, documentation from the country of origin, legalisations, sworn translations and sufficient powers of attorney to act in Spain must also be prepared.

Usual steps for setting up a subsidiary

1. Preliminary analysis of the corporate, tax and governance structure.
2. Obtaining a tax identification number (NIF) for the foreign parent company, where applicable.
3. Reservation of the company name with the Central Commercial Registry.
4. Preparation of the articles of association and notarial powers of attorney.
5. Opening a bank account and paying in the share capital.
6. Execution of the deed of incorporation before a notary.
7. Registration with the Commercial Registry.
8. Obtaining the definitive NIF and registering for tax purposes with the Spanish Tax Agency (AEAT).
9. Registration of tax, employment and accounting obligations.

At MGI Àmbit, we coordinate these steps so that the foreign company can establish itself in Barcelona with a clear legal structure adapted to its objectives.

Steps to open a branch or permanent establishment

Opening a branch requires evidence of the foreign company’s existence, its formal decision to operate in Spain, the appointment of a representative and the documentation required for registration and tax enrolment.

Usual documentation

• Deed, articles of association or equivalent document of the foreign company.
• Certificate of good standing of the parent company.
• Resolution to open a branch or establishment in Spain.
• Appointment of a representative in Spain, mandatory for a branch.
• Sufficient notarial powers of attorney.
• Apostille or legalisation and sworn translation, where applicable.
• Tax registration with the AEAT and obtaining a NIF.

Nevertheless, the process may appear more straightforward than setting up a subsidiary, but complexity often arises in the international coordination of documents and the correct tax definition of the activity attributable to the PE.

Transfer pricing and intragroup transactions

Likewise, both a subsidiary and a permanent establishment may give rise to transfer-pricing obligations. In international groups, this is one of the main sources of tax audits and adjustments.

Subsidiary and parent company: related-party transactions

When a Spanish subsidiary buys, sells, receives services, pays royalties, bears management expenses or receives financing from its parent company, those transactions must be valued at market price. It may also be necessary to prepare specific related-party transaction documentation and file information returns, such as Form 232, where certain thresholds are exceeded.

PE and head office: profit attribution

For a permanent establishment, the challenge is not only to value transactions between different entities, but also to determine what share of the overall profit belongs to the Spanish presence. This requires an analysis of functions, assets, risks, staff, relevant decisions and the PE’s effective contribution to the business.

Consequently, incorrect attribution may cause the AEAT to adjust the PE’s taxable base and demand additional tax, interest and penalties.

Employment and Social Security obligations

Hiring employees in Spain must be planned before choosing the structure. Indeed, hiring through a Spanish subsidiary is not the same as seconding employees from the parent company or hiring staff connected to a PE.

Employees hired by a subsidiary

The subsidiary acts as a Spanish employer. It must comply with Spanish employment law, the applicable collective bargaining agreement, Social Security obligations, occupational risk prevention, payroll, withholding taxes and employment-related filings.

Seconded workers or employees linked to a PE

In permanent-establishment structures, workers may be seconded from abroad, hired locally or employed by the parent company while providing services in Spain. Therefore, each scenario requires a review of employment law, Social Security rules, bilateral agreements or EU coordination regulations.

In addition, MGI Àmbit has tax, employment and accounting departments, enabling the international establishment to be analysed as a whole and avoiding partial solutions.

Common mistakes when choosing between a subsidiary and a permanent establishment

Good planning prevents problems. The following are some of the most common mistakes we see among international companies establishing themselves in Spain:

Choosing based on initial cost rather than risk

The cheapest structure at the outset is not always the most efficient. If the activity grows, staff are hired or liabilities to third parties arise, a subsidiary may be safer than a PE.

Failing to review the double taxation treaty

On the other hand, the treaty between Spain and the parent company’s country can completely change the analysis: the definition of a PE, withholding taxes, dividends, business profits, interest, royalties and mechanisms to avoid double taxation.

Creating a subsidiary without genuine substance

Likewise, a subsidiary must have economic substance. If it lacks resources, effective management, staff, contracts or genuine autonomy, it may create anti-abuse risks and problems when applying tax benefits.

Failing to document intragroup transactions

Services from the parent company, loans, royalties, shared costs or staff secondments must be properly documented. Consequently, without supporting evidence, deductibility may be challenged.

Failing to update the structure when the business changes

For example, a company may start with a PE and need a subsidiary as it grows. It may also have a subsidiary that requires reorganisation if turnover, the team or business flows change. For this reason, reviewing the structure periodically is essential.

Checklist before deciding: subsidiary or permanent establishment

Before choosing, it is advisable to answer the following questions:

• Will the activity in Spain be temporary or permanent?
• Will the company hire employees in Barcelona or another Spanish city?
• Are there contractual risks or liabilities to third parties?
• Does the parent company wish to limit its asset exposure?
• Will profits be distributed or reinvested in Spain?
• Which double taxation treaty applies?
• Will there be related-party transactions with the parent company?
• Does the company need a bank account, financing or access to local tenders?
• Will the structure have sufficient economic substance?
• Has the risk of an unintended PE been analysed?

MGI Àmbit: international tax advisory services for companies in Barcelona

MGI Àmbit is a firm of lawyers and economists based in Barcelona that advises companies on tax, accounting, employment, corporate and financial matters. In addition, its experience in international taxation and its coverage through the MGI Worldwide network enable it to support groups with cross-border activities and complex establishment needs.

If your company is considering setting up a subsidiary in Spain, opening a branch, managing a permanent establishment or reviewing whether its current presence in Barcelona or elsewhere in Spain is properly structured, the MGI Àmbit team can help you make a decision based on tax, legal and operational criteria.

Conclusion: there is no universally better structure, only the right structure for each company

The difference between a subsidiary and a permanent establishment cannot be resolved with a generic answer. On the one hand, a subsidiary offers its own legal personality, limited liability and a stronger local presence. On the other hand, a permanent establishment can be useful for temporary projects or exploratory phases, but it requires precise tax management and may directly expose the parent company.

In summary, the key is to analyse the project before commencing operations: the planned activity, country of origin, applicable treaty, employees, turnover, risks, intragroup transactions and growth strategy. Ultimately, the choice between a Subsidiary or permanent establishment in Spain must reflect the reality of the business. Therefore, making the right decision at the outset can prevent penalties, double taxation, corporate disputes and restructuring costs.

At MGI Àmbit we support international companies in setting up subsidiaries, branches and permanent establishments in Spain. If you need specialist advice in Barcelona or anywhere else in Spain, contact our team and we will analyse your case personally.

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