Setting up a Branch in Spain
Investing in Spain as a Foreign Investor
Foreign investors looking to invest in Spain can consider various options, including:
Opening a Branch or Representative Office: To establish a branch, a public deed must be signed and registered at the Mercantile Registry. Under Spanish foreign investment law, the branch must allocate capital, though there is no specific minimum capital requirement. The branch should have a legal representative with the authority to manage its affairs.
Forming a Spanish Company: Traditionally, corporations (S.A.) have been the preferred choice, but limited liability companies (S.L.) have become increasingly common in recent years.
Associating with Established Businesses: Joint ventures are a popular way to enter the Spanish market, allowing investors to share risks and resources. Spanish law provides for different types of joint ventures.
However, investors need not necessarily create a new entity or associate with existing ones to enter the Spanish market. Several alternative approaches include:
- Making Distribution Agreements: Partnering with local distributors to reach the Spanish market efficiently.
- Operating through an Agent: Appointing agents to represent the investor’s interests in Spain.
- Operating through a Commission Agent: Engaging commission agents for specific transactions.
- Establishing a Franchise: Setting up a franchise business in collaboration with a local partner.
Forming a Branch in Spain
To establish a branch, the procedure entails the execution of a public deed, which should subsequently be registered at the Mercantile Registry. In accordance with Spanish foreign investment regulations, the branch is obliged to have an allocated capital, although there exists no specific minimum capital requirement.
A key requirement for a branch is the appointment of a legal representative vested with the authority to oversee its operations. Unlike formal managing or administrative bodies, the branch largely functions in its commercial interactions with third parties as if it were an independent company.
The decision between opting for a branch or forming a subsidiary in Spain may be swayed by various factors, including commercial considerations, where a company might offer a more “stable” presence compared to a branch, or legal considerations focused on limiting the shareholder’s liability.
Procedures for Registering a Branch
In a broad sense, the prerequisites, formalities, and associated expenses for initiating a branch closely mirror those for establishing a subsidiary. However, from a legal perspective, the most salient distinctions between a branch and a subsidiary are summarized as follows:
From a legal point of view, the most important differences between a branch and a subsidiary are as follows:
|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.
|Minimum of €60,000
|Minimum of €3,000
|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.
|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.
The 30% Corporate Income Tax rate is applicable to both branches and subsidiaries concerning their net income. However, specific considerations come into play:
When remitting income from a branch or distributing dividends from a subsidiary to a non-EU or non-tax treaty country with Spain, Spain imposes a tax rate of 19% (21% for tax years 2012 and 2013). In contrast, remittances or distributions to a parent company within the EU are typically tax-exempt.
If the parent company is situated in a non-EU country that has a tax treaty with Spain, dividends from a subsidiary may be subject to a reduced treaty rate, while remittances of income from a branch are usually not taxed in Spain under most tax treaties.
In terms of general cost-sharing arrangements with the parent company, it is often more straightforward for general costs to be considered deductible when dealing with a branch as opposed to a subsidiary.
Generally, interest on loans from the foreign parent company to its Spanish branch is not considered tax-deductible by the branch. Conversely, interest on loans from the shareholders of a subsidiary is typically deductible, provided it adheres to an arm’s-length rate and does not exceed the net remunerated indebtedness ratio (note that this ratio does not currently apply to EU-resident entities).
Taxation in Spain
An Overview of Investment Environment
The Spanish economy endured significant challenges during the recession. Following its entry into the EU, Spain witnessed substantial economic growth, with a tourism industry that became the world’s second-largest, contributing approximately 50% of GDP in 2006. Additionally, the real estate boom played a pivotal role, accounting for nearly 16% of GDP and employing 12% of the workforce. The subsequent collapse of the property market resulted in a surge in personal debt, while unemployment rates reached as high as 26%.
In Spain, the standard corporate income tax rate stands at 30%. Personal income tax varies between 24% and 45%. For the tax years 2012 and 2013, an additional supplementary tax ranging from 0.7% to 7% is applicable.
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, while non-resident companies are taxed on their Spanish-sourced income.
Income Tax Rates
The corporate income tax rate for 2013 is 30%, with a reduced rate applying to businesses with lower turnovers.Micro enterprises with limited turnover and employees benefit from even lower tax rates.
Calculation of Taxable Base
Taxable income includes trading profits, passive income, and capital gains.Capital gains are subject to varying tax rates, with the rate increasing beyond a certain threshold.
Losses can be carried forward for up to 15 years.
Sales Tax and VAT
Spain’s standard VAT rate is 21%, with a reduced rate of 10% applying to specific sectors such as food production and services.
Filing and Payment of Tax
The tax year typically follows the calendar year, although companies may opt for an alternative accounting year.
Tax returns must be filed and taxes paid within specific deadlines, typically around the 25th day following the end of the tax year.
Companies making over a certain annual turnover are required to make three tax prepayments throughout the year.
Withholding tax rates apply to interest, dividends, royalties, and other payments, both domestically and internationally.
Rates vary depending on factors such as the recipient’s location and ownership.
These investment options and tax considerations can help foreign investors navigate their entry into the Spanish market effectively.
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