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Fiscal, 05/08/26

Subsidiary or permanent establishment in Spain

When a foreign company decides to operate in Spain, one of the first decisions it must make is whether to establish a subsidiary, open a branch , or operate through a permanent establishment. Therefore, this choice is not a simple business formality: it affects taxation, liability, hiring, transfer pricing, profit repatriation, and the parent company's level of exposure.

In a city like Barcelona, where international groups, technology companies, industrial firms, professional services companies, and organizations with cross-border operations converge, choosing the right approach to establishing a presence can avoid unnecessary tax costs and future issues with the Spanish Tax Agency. Therefore, analyzing the options of a subsidiary or permanent establishment in Spain allows for tailoring the structure to the actual activity and objectives of the group.

En MGI Àmbit, firma de abogados y economistas con sede en Barcelona y cobertura nacional e internacional, asesoramos a empresas e internacionales en procesos de implantación, creación de filiales en España, apertura de sucursales, gestión de establecimientos permanentes y planificación fiscal internacional. Además, esta guía explica las diferencias clave entre filial y establecimiento permanente para ayudarte a tomar una decisión con criterio.

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

Subsidiary or permanent establishment in Spain: why this decision is so important

The decision between a subsidiary and a permanent establishment will determine how the company operates in Spain from day one. Furthermore, it not only dictates which tax is filed, but also who is responsible to suppliers, customers, employees, government agencies, and other third parties.

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However, many international companies make the mistake of choosing a structure based on speed or initial cost. A seemingly simpler structure can create problems if business volume grows, if local staff are hired, if there are intragroup transactions, or if the parent company needs to limit its liability. Therefore, the comparison between a subsidiary and a permanent establishment in Spain should be made considering the entire project, not just the incorporation costs.

A fiscal, commercial and operational decision

First, the implementation in Spain must be analyzed from three angles:

Tax: what tax applies, how the taxable base is calculated, whether there are withholdings, how profits are repatriated, and what double taxation agreement is applicable.
Commercial: whether an independent company is created, whether a branch is opened, or whether the parent company operates directly with a local presence.
Operations: hiring employees, invoicing, accounting, dealing with banks, tenders, suppliers and customers.

What is a subsidiary in Spain?

A subsidiary is a commercial company incorporated in Spain and controlled by a parent company, which can be foreign or domestic. Generally, it is common to establish a Limited Liability Company (SL) , although in certain projects a Public Limited Company (SA) may also be an option .

Furthermore, the subsidiary has its own legal personality. Specifically, this means that it has its own tax identification number, registered office, governing body, accounting records, annual accounts, tax obligations, and independent 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 provided by the parent company, commingling of assets, fraud, or piercing the corporate veil. Liability can also be transferred when the parent company is also the administrator of the subsidiary and certain circumstances apply.

For this reason, this separation is especially valuable when the activity in Spain involves relevant contracts, employees, bank financing, liability towards clients, labor risks or potential litigation.

Share capital of a Spanish subsidiary

In a limited liability company (SL), the minimum legal share capital is currently €1. However, when the share capital is less than €3,000, there are special rules: at least 20% of the profit must be allocated to the legal reserve until the sum of the share capital and reserve reaches €3,000, and there may be additional liabilities in the event of liquidation with insufficient assets.

Therefore, although it is possible to establish a subsidiary with 1 euro, many international companies choose to capitalize it adequately from the beginning to convey solvency to banks, suppliers and customers.

What is a permanent establishment in Spain?

A permanent establishment is a tax concept. It arises when a non-resident company has a stable presence in Spain through which it carries out all or part of its economic activity. Determining this requires a careful and ad hoc analysis.

For example, a permanent establishment may exist, among other cases, when the foreign company has an office, headquarters, branch, factory, workshop, operational warehouse, construction site or installation of a certain duration in Spain, or when it acts through a dependent agent with powers to contract on behalf of the company.

The EP does not have its own legal personality

Unlike a subsidiary, a permanent establishment is not a separate company. It is the foreign company itself operating in Spain. Therefore, the obligations assumed by the permanent establishment can directly bind the parent company.

From a tax perspective, the permanent establishment (PE) must pay taxes in Spain on the income attributable to it. To do so, it needs separate accounting records and documentation that identifies which income, expenses, assets, functions, and risks correspond to its Spanish activity.

Branch and permanent establishment: practical difference

A branch office is a form of commercial presence for a foreign company in Spain. It is registered in the Mercantile Registry and has a permanent representative. From a tax perspective, a branch office usually constitutes a permanent establishment.

Therefore, it can be said that a branch is a commercial registration of a foreign company in Spain, while a permanent establishment is the tax consequence of operating in Spain with a stable presence. However, not all branches necessarily constitute a permanent tax establishment, nor are all permanent establishments represented by a branch.

Tax differences between subsidiary and permanent establishment

The most visible tax difference is the applicable tax. The subsidiary is taxed under the Corporate Income Tax, while the permanent establishment is subject to the Non-Resident Income Tax and the applicable bilateral agreement, without prejudice to the fact that it must file the tax return using the same form as corporate income tax payers (form 200) and within the same deadlines.

Taxation of a Spanish subsidiary

Since the subsidiary is a tax resident in Spain, it is subject to Corporation Tax. Specifically, the standard rate is 25%, although reduced or special rates may apply in certain cases, such as for newly created entities, micro-enterprises, or small businesses, provided the legal requirements are met.

When a subsidiary distributes dividends to its foreign parent company, withholding tax may apply in Spain. The standard dividend tax rate is 19%, but this can often be reduced or eliminated under a double taxation treaty or European parent-subsidiary regulations, provided the participation, holding, and anti-abuse requirements are met.

Taxation of a permanent establishment

The permanent establishment is taxed in Spain on the income attributable to its Spanish activity. In practice, rules similar to those for Corporation Tax are applied to determine the taxable base, but with specific provisions for non-residents. Given the complete legal identity with the parent company, the application of reduced tax rates is very exceptional

The permanent establishment (PE) must file its tax return using the appropriate form for Corporate Income Tax/Non-Resident Income Tax and make installment payments under the same terms as resident entities. Furthermore, when a non-resident entity transfers income from the PE abroad, a supplementary tax of 19%, unless an exception applies under EU regulations or an international agreement.

Deductible expenses and transactions with the head office

In the subsidiary, payments to the parent company for management services, financing, licenses or transfer of assets may be deductible if they are real, necessary, properly documented and valued at market price.

In a permanent establishment, the relationship with the head office requires more nuanced analysis. Therefore, the allocation of profits is often more complex and must reflect which functions, assets, and risks truly belong to the permanent establishment. Certain internal payments to the head office may have deductibility limitations, making it essential to review Spanish regulations and the applicable double taxation treaty.

Comparative table: subsidiary vs permanent establishment in Spain

Criterion	Spanish subsidiary	Permanent establishment / branch
Legal personality	Yes. It is an independent Spanish company.	No. It's an extension of the foreign company.
Patrimonial liability	Limited to the assets of the subsidiary, except in certain cases.	The parent company is directly responsible for the obligations of the EP.
Main tax	Corporate tax.	IRNR with permanent establishment.
General type	25%, but significant reductions	25%, in practice.
Repatriation of profits	Dividends subject to withholding, reducible by CDI or EU regulations.	There may be an additional 19% tax on income transferred abroad.
Accounting	It includes full accounting and its own annual accounts.	It requires separate accounting for the activity attributable to the permanent establishment. The branch requires filing the parent company's accounts
Related party transactions	Transfer pricing rules apply with the parent company.	Attribution of benefits to the EP as a separate entity is required.
Hiring employees	Hire as a Spanish employer.	You can hire or transfer employees, with greater social security complexity.
Access to banks, tenders and suppliers	Usually simpler.	It may be more limited or require more documentation.
Recommended use	Stable activity, growth, local team, lower risk for the parent company.	Temporary activity, specific project or exploratory phase.

When is it advisable to create a subsidiary in Spain?

Regarding the question of a subsidiary or a permanent establishment in Spain, setting up a subsidiary is usually the most suitable option when the company anticipates a stable presence in Barcelona or the rest of Spain. In other words, when the aim is not simply to test the market, but to develop ongoing business, hire staff, sign significant contracts, and build a solid local presence.

Typical cases in which we recommend analyzing a subsidiary

International companies that want to open a permanent headquarters in Barcelona.
Groups that need to hire local equipment with legal security.
Companies that want to limit the parent company's liability.
Companies that plan to seek bank financing or subsidies in Spain.
Businesses with a significant turnover in the Spanish market.
Companies that want to operate with a stronger local image in front of customers and suppliers.

The subsidiary also facilitates the group's internal organization when medium- or long-term growth is anticipated. It allows for the separation of results, costs, teams, responsibilities, and risks by territory.

When might a permanent establishment be sufficient?

A permanent establishment, or specifically the creation of a branch, may be appropriate when the presence in Spain is limited to a specific project or an initial market phase, provided that the analysis concludes that such a permanent establishment actually exists from a tax perspective. However, it should be carefully analyzed, as it does not always imply fewer obligations.

Scenarios in which an EP can fit

Temporary projects for installation, assembly, construction or specialized services.
Companies that want to test the market before establishing a Spanish company.
Activities with low volume and without the need for their own corporate structure.
Transactions in which the applicable double taxation agreement allows for efficient tax management.
Scenarios in which the parent company wants to maintain direct control of the Spanish operation.

However, the risk lies in thinking that a permanent establishment or the creation of a branch is an informal solution. It is not. If a permanent establishment exists, there are tax, accounting, and documentary obligations that must be met from the outset.

Risk of involuntary permanent establishment

One of the most delicate issues in international taxation is that a foreign company can create a permanent establishment in Spain without having planned it. Specifically, this occurs when its actual business activity exceeds the threshold of presence permitted by domestic law or the applicable double taxation treaty.

Situations that can unintentionally cause EP

Inter alia:

Having staff in Spain who routinely negotiate or close contracts.
Use an office or fixed space from which effective business activity is carried out.
Have an operational warehouse, workshop, facility or management headquarters in Spain.
To carry out works, installations or projects of significant duration.
Working through a dependent agent with the ability to link the foreign company.

Therefore, detecting this risk early is key. To correctly resolve the query regarding a subsidiary or permanent establishment in Spain, it is also necessary to analyze whether the current activity has already generated an unintentional permanent establishment. If the Tax Agency considers that an undeclared permanent establishment existed, it can demand back taxes, interest, penalties, and documentation of related-party transactions.

Procedures for creating a subsidiary in Spain

Setting up a subsidiary requires coordinating commercial, tax, notarial, and banking procedures. When the partner is a foreign company, additional documentation from its country of origin, legalizations, sworn translations, and sufficient powers of attorney to operate in Spain must also be prepared.

Choosing the wrong structure can cost you much more than you imagine. Talk to our team of lawyers and economists today and make your decision with complete confidence.

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Typical steps to set up a subsidiary

Preliminary analysis of the corporate, tax and governance structure.
Obtaining the NIF of the foreign parent company, if applicable.
Reservation of company name in the Central Commercial Registry.
Preparation of articles of association and powers of attorney.
Opening of a bank account and disbursement of share capital.
Signing of the articles of incorporation before a notary.
Registration in the Commercial Registry.
Obtaining a definitive NIF (Tax Identification Number) and registering with the AEAT (Spanish Tax Agency).
Registration of tax, labor and accounting obligations.

En MGI Àmbit coordinamos estos pasos para que la empresa extranjera pueda implantarse en Barcelona con una estructura jurídica clara y adaptada a sus objetivos.

Procedures for opening a branch or permanent establishment

Opening a branch requires proving the existence of the foreign company, its formal decision to operate in Spain, the appointment of a representative, and the documentation that allows its registration and tax registration.

Standard documentation

Deed, articles of association or equivalent document of the foreign company.
Certificate of validity of the parent company.
Agreement to open a branch or establishment in Spain.
Appointment of a representative in Spain, mandatory if a branch.
Sufficient notarial powers.
Apostille or legalization and sworn translation, where applicable.
Tax registration with the AEAT and obtaining a NIF (Tax Identification Number).

However, although the process may seem more straightforward than establishing a subsidiary, the complexity usually arises in the international coordination of documents and in the correct tax definition of the activity attributable to the permanent establishment.

Transfer pricing and intragroup transactions

Similarly, both a subsidiary and a permanent establishment can generate transfer pricing obligations. In international groups, this matter 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, incurs management expenses, or receives financing from its parent company, these transactions must be valued at market price. Furthermore, it may be mandatory to prepare specific documentation for related-party transactions and file informational forms, such as Form 232, if certain thresholds are exceeded.

EP and head office: allocation of benefits

In the case of a permanent establishment, the challenge is not only to value transactions between different entities, but also to determine what portion of the overall profit corresponds to the Spanish presence. This involves analyzing functions, assets, risks, personnel, relevant decisions, and the permanent establishment's effective contribution to the business.

Consequently, an incorrect attribution may cause the Spanish Tax Agency (AEAT) to adjust the taxable base of the permanent establishment (PE) and demand additional fees, interest and penalties.

Labor and Social Security obligations

Hiring employees in Spain should be planned before choosing the organizational structure. Indeed, hiring through a Spanish subsidiary is not the same as transferring workers from the parent company or hiring staff linked to a permanent establishment.

Employees hired by a subsidiary

The subsidiary acts as a Spanish employer. It must comply with Spanish labor regulations, the relevant collective bargaining agreement, Social Security obligations, occupational risk prevention, payroll, withholdings, and labor communications.

Workers posted to or linked to a permanent establishment

In permanent establishment structures, there may be workers posted from abroad, locally hired employees, or staff who report to the parent company but provide services in Spain. Therefore, each scenario requires a review of labor regulations, Social Security provisions, bilateral agreements, or European coordination regulations.

Además, MGI Àmbit cuenta con área fiscal, laboral y contable, lo que permite analizar la implantación internacional de forma conjunta y evitar soluciones parciales.

Common mistakes when choosing between a subsidiary and a permanent establishment

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

Choose based on initial cost rather than risk

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

Not reviewing the double taxation agreement

Furthermore, the agreement between Spain and the parent company's country can completely change the analysis: definition of PE, withholdings, dividends, business profits, interest, royalties and mechanisms to avoid double taxation.

To create a subsidiary with no real substance

Furthermore, a subsidiary must have economic substance. If it lacks resources, effective management, personnel, contracts, or real autonomy, it can create anti-abuse risks and problems in claiming tax benefits.

Failure to document intragroup transactions

Services from the parent company, loans, royalties, shared expenses, or staff transfers must be properly documented. Consequently, without supporting documentation, deductibility may be challenged.

Do not update the structure when the business changes

For example, a company might start with a single-unit company and need a subsidiary as it grows. It might also have a subsidiary that requires reorganization if its volume, team, or business flows change. Therefore, reviewing the structure periodically is an essential practice.

Checklist before deciding: subsidiary or permanent establishment

Before choosing, it's a good idea to answer these questions:

Will the activity in Spain be temporary or permanent?
Will the company hire employees in Barcelona or in another Spanish city?
Are there contractual risks or liability towards third parties?
Does the parent company want to limit its equity exposure?
Will profits be distributed or reinvested in Spain?
Which double taxation treaty applies?
Will there be transactions linked to the parent company?
Does the company need a bank account, financing, or local tenders?
Will the structure have sufficient economic substance?
Has the risk of involuntary PE been analyzed?

MGI Àmbit: asesoría fiscal internacional para empresas en Barcelona

MGI Àmbit es una firma de abogados y economistas con sede en Barcelona que asesora a empresas en materia fiscal, contable, laboral, mercantil y financiera. Además, su experiencia en fiscalidad internacional y su cobertura a través de la red MGI Worldwide permiten acompañar a grupos con actividad transfronteriza y necesidades complejas de implantación.

Si tu empresa está valorando crear una filial en España, abrir una sucursal, gestionar un establecimiento permanente o revisar si su presencia actual en Barcelona o en el resto de España está correctamente estructurada, el equipo de MGI Àmbit puede ayudarte a tomar una decisión basada en criterios fiscales, jurídicos y operativos.

Conclusion: there is no single best structure, there is a structure that is right 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 greater local stability. On the other hand, a permanent establishment can be useful for temporary projects or exploratory phases, but it requires precise tax management and can directly expose the parent company.

Ultimately, the key lies in analyzing the project before starting operations: planned activity, country of origin, applicable tax treaty, number of employees, turnover, risks, intragroup transactions, and growth strategy. In short, the choice between a subsidiary or a permanent establishment in Spain must reflect the realities of the business. Therefore, making the right decision from the outset can prevent penalties, double taxation, commercial disputes, and restructuring costs.

En MGI Àmbit acompañamos a empresas internacionales en la creación de filiales, sucursales y establecimientos permanentes en España. Si necesitas asesoramiento especializado en Barcelona o en cualquier otra parte de España, contacta con nuestro equipo y analizaremos tu caso de forma personalizada.

Frequently asked questions about subsidiaries and permanent establishments in Spain

En MGI Àmbit llevamos años ayudando a empresas a expandirse con la estructura jurídica y fiscal más ventajosa. Cuéntanos tu proyecto y te ayudamos a dar el siguiente paso.

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What is the difference between a subsidiary and a permanent establishment?+

A subsidiary is an independent Spanish company with its own legal personality and limited liability. In contrast, a permanent establishment is a tax presence of a foreign company in Spain, without separate legal personality. Therefore, this difference affects liability, taxation, and accounting obligations.

Which is taxed less, a subsidiary or a permanent establishment?+

There is no single answer. Generally, both entities can be taxed at the standard rate of 25%, but the subsidiary may benefit from dividend rules and double taxation treaties, while the permanent establishment (PE) may be subject to additional taxation on income transferred abroad. Therefore, the comparison must be made on a case-by-case basis.

Is a branch the same as a permanent establishment?+

Not exactly. On the one hand, a branch is a business entity that is usually registered in the Commercial Registry. On the other hand, a permanent establishment is a tax concept. In practice, a branch typically constitutes a permanent establishment for tax purposes.