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Registering a Branch in Spain

Incorporation services

A foreign investor can invest in Spain by:

Opening a branch or representative office.

Forming a Spanish company: traditionally, the most-used corporate form has been the corporation (S.A.); however, in recent years the formation of limited liability companies (S.L.s) has also become commonplace.

Associating with other businesses already established in Spain: joint ventures are a common way of setting up business in Spain, since they enable their members to share risks and pool resources and experience. Spanish law provides for different types of joint venture.

However, creating a new entity or associating with pre-existing entities is not the only way to invest in Spain. It is possible to gain a foothold in the Spanish market without having to physically set up a center of operations in Spain by:

  • Making distribution agreements.
  • Operating through an agent.
  • Operating through a commission agent.
  • Establishing a franchise.

Forming a Branch in Spain

To open a branch, a public deed must be signed and registered at the Mercantile Registry. Under Spanish foreign investment legislation, the branch must be allocated capital, although there is no minimum capital requirement.

The branch must have a legal representative with authority to manage its affairs. It does not have any formal managing or administrative bodies as such, and it largely operates as if it were a company in its commercial dealings with third parties.

The choice between forming a branch or a subsidiary in Spain may be influenced by commercial considerations (e.g., a company might provide a more “stable” presence than a branch) or by considerations of legal certainty (a subsidiary limits the shareholder’s liability).

Formalities to register a Branch

Broadly speaking, the requirements, formalities and costs related to opening a branch are very similar to those for forming a subsidiary.

From a legal point of view, the most important differences between a branch and a subsidiary are as follows:

SA
SL
Branch
Concept Company of a commercial nature engaging in a business with its own capital. Permanent establishment, enjoying certain degree of management independence. Vehicle for parent company’s activities. Lacks separate legal personality from its parent company.
Stock capital Minimum of €60,000 Minimum of €3,000 Not required
Cash and non-cash contributions Cash contributions in euros. In the case of an S.A., non-cash contributions require a report from an independent expert appointed by the Mercantile Registrar.
Registration Public deed must be registered at the Mercantile Registry. Together with the public deed creating the branch, the documents attesting the existence of the parent company, its by-laws in force, its Directors and the decision of opening the branch, duly legalized, must be registered at the Mercantile registry.

Tax consideration

30% Corporate Income Tax rate is applicable to both, the branch and the subsidiary, on their net income. However, certain aspects must be taken into account:
The remittance of income from a branch, or the distribution of dividends from a subsidiary to a parent company not resident in the EU or in a country that has a tax treaty with Spain, is taxed in Spain at 19% (21% for tax years 2012 and 2013). If the parent company is resident in the EU, the remittance/ distribution is usually tax exempt.
If the parent company is resident in a non-EU country that does have a tax treaty with Spain, any dividends in the case of a subsidiary will be taxed at the reduced treaty rate, whereas any remittance of income in the case of a branch will not be taxed in Spain (under most tax treaties).
General cost-sharing arrangement with the parent company: in practice, it is usually easier for general costs to be considered deductible in the case of a branch than in the case of a subsidiary.
Interest on loans from the foreign parent company to its Spanish branch is not, in principle, tax deductible by the branch. Interest on loans from the shareholders of a subsidiary is usually deductible by the subsidiary, provided that it is at an arm’s-length rate and the ratio of net remunerated indebtedness is not exceeded (note that the ratio does not currently apply to entities resident in the EU).

Taxation in Spain

Spain country and foreign investment overview

Spain’s economy has suffered hugely during the recession. Since joining the EU, Spain enjoyed rapid growth; over the past 40 years its tourist industry had grown to the second largest in the world and accounted for around 50% of GDP in 2006.

The real estate boom that followed contributed almost 16% of GDP and employed 12% of the workforce. The collapse of the property boom has led to high increases in personal debt with unemployment now at the 26% mark.

The standard corporate income tax rate is 30%. Personal income tax ranges from 24% to 45%. For 2012 and 2013 tax years, a supplementary tax of between 0.7% and 7% applies.

Scope of corporate tax

All resident companies and permanent establishments of non-resident companies are subject to income tax. Resident companies are liable for tax on their worldwide income. Non-resident companies are taxed on their Spanish-sourced income only.

Income tax rates

The corporate income tax rate for 2013 is 30%. For businesses with a turnover of less than EUR10m, the first EUR300,000 of profit are taxed at either 20% or 25%. Micro enterprises with a turnover below EUR5m and fewer than 25 employees is taxed at 20% for the first EUR300,000 and anything above that at 25%.

Calculation of taxable base

Taxable income includes all trading profits, passive income and capital gains. The first EUR6,000 of capital gains is taxed at 19%; after that, the rate increases to 21%. Federal or local losses may be carried forward for a maximum of 15 years.

Sales tax and VAT

The standard VAT rate is 21%. A reduced rate of 10% applies to food production and services.

Filing requirements and payment of tax

The tax year is generally the calendar year, although the company may choose an alternative accounting year. Tax returns must be filed and all taxes due paid by the 25th day following the sixth month of the end of the tax year.

Companies are generally required to make three tax prepayments in April, October and December of each year, based on accounts of the first three, nine and 11 months of the calendar year, respectively. This is compulsory for businesses with an annual turnover of more than EUR 6,010,121.04 (for 2012), at a rate of between 21% and 29%. However, companies with a turnover below this threshold can opt to pay instalments at a rate of 18% of the gross tax payable in the previous year.

Withholding taxes

Withholding tax of 21% is payable on interest and dividend payments, whether domestic or to non-treaty countries. However, where dividends are paid to a company that has share capital, which has been held during the prior year, equal to or above 5%, withholding tax does not apply.

Royalties are generally subject to withholding tax of 24.75% in the case of the licensing of rights of publicity, and 18% for other royalties. Until 2011, royalties paid to associated EU-resident companies are subject to withholding tax of 10%.

Other withholding taxes include 18% on commission, rental payments and contest prizes; 15% on income from courses, conferences, symposiums, seminars or derived from the literary, artistic or scientific work; and 2% on farming income and forestry activities.

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