Permanent establishment in Spain – Tax consequences

In which cases can the existence of a Permanent Establishment in Spain arise? What are the consequences of a foreign entity having a Permanent Establishment in Spain? Can the hiring of logistics services in Spain by a non-resident company entail the existence of a Permanent Establishment?

The permanent establishment

The existence of a Permanent Establishment (hereinafter PE) in Spain has consequences both for the Non-Resident Income Tax (NRIT) and for Value Added Tax (VAT).

1.- PE and Non-Resident Income Tax (NRIT)

With regard to the NRIT, it is first necessary to examine whether a Convention for the avoidance of double taxation in relation to income taxes exists between the Kingdom of Spain and the State where the foreign entity is resident.

This is because the fundamental principle established in Art. 7 of the OECD Model Tax Convention on Income and on Capital (hereinafter, OECD MTC) on which the majority of the double taxation conventions in force in Spain are based, is that the profits of an enterprise of a Contracting State shall be taxable ONLY in that State, unless the enterprise carries on business in the other Contracting State through a PE situated in that State.

Therefore, a sensu contrario, if the foreign entity does not have a PE in Spain, its profits will not be subject to taxation in Spain.

Art. 5 of the OECD MTC provides a definition of PE based on the existence of “a fixed place of business” through which the foreign enterprise carries on all or part of its activity. A series of cases included in the definition of PE follow, such as: the place of management, branches, factories, etc. The presence of a PE may also be linked to the conduct of an activity through an agent, always in the sense described in Art. 5.

Let us examine these two aspects.

Fixed place of business

With regard to the definition of “fixed place of business”, the commentaries to the OECD MTC are useful and are also commonly cited by the Spanish Tax Authorities.

Commentary 6 to Article 5(1) of the OECD MTC in relation to “permanent establishment” states the following:

“6. Paragraph 1 provides a general definition of the term ‘permanent establishment’ which brings out its essential characteristics for the purposes of the Convention; that is, a distinct situs, a ‘fixed place of business’. The paragraph defines the term ‘permanent establishment’ as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The conditions contained in this definition are therefore as follows:

– The existence of a ‘place of business’, i.e. a facility such as premises or, in certain cases, machinery or equipment;

– This place of business must be ‘fixed’, i.e. it must be established at a distinct place with a certain degree of permanence;

– The carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise carry on the business of the enterprise in the State in which the fixed place is situated”.

The commentaries to Art. 5 of the OECD MTC further add that:

the term “place of business” covers any premises, facilities or installations used for carrying on the business of the enterprise, whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot. The place of business may also be situated in the business facilities of another enterprise. This would be the case, for example, where the foreign enterprise had at its permanent disposal certain premises or a part thereof belonging to another enterprise.

On the basis of these criteria, the Spanish Tax Agency (AEAT) considers, for example, that a PE may subsist in the case of a chemical products company, domiciled in the United Kingdom, that hires a warehouse from a Spanish logistics company to place tank containers in which to store its products, in the event that the activities to be carried out in Spain are not merely preparatory or auxiliary in nature, but rather represent the development of the company’s main activity (CV2138-13).

Also, for the purposes of double taxation conventions, a PE could exist even where there are no employees of the foreign company at the fixed place of business, since a company can also carry on its activity through subcontractors. Therefore, if a foreign company has a rented warehouse in Spain, it will be necessary to ascertain whether the foreign company merely carries out a preparatory or auxiliary activity at those premises, or whether it actually carries out its main activity there (CV2411-21).

Existence of an agent

On the other hand, Article 5 of the OECD MTC also includes the possibility of a PE existing when there is a person in the territory who acts for the foreign enterprise, even if the enterprise does not have a fixed place of business.

According to the commentaries to the OECD MTC, for an enterprise to be considered as having a PE despite not having a fixed place of business, all of the following conditions must be met:

1. A person acts in a Contracting State on behalf of an enterprise.
2. In doing so, that person habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and
3. These contracts are concluded either in the name of the enterprise, or for the transfer of ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or for the provision of services by that enterprise.

Here, it should be underlined that Conventions may vary, including all or part of the above conditions for a PE to exist.

For example, the double taxation Convention between Spain and Switzerland does not include the second part of point two, namely: “person who habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise”, but only its first part: “a person — other than an agent of independent status to whom paragraph 5 applies — acting in a Contracting State on behalf of an enterprise and has, and habitually exercises, in a Contracting State, an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State”.

With regard to the concept of having the authority to conclude contracts on behalf of an enterprise or of playing the principal role leading to such conclusion, the commentaries to the OECD MTC clarify the concept:

“The phrase ‘concludes contracts’ focuses on situations where, under the relevant law governing contracts, a person is considered to have concluded a contract. A contract may be concluded without any active negotiation of the terms of that contract; this would be the case, for example, where the relevant law provides that a contract is concluded when a person accepts, on behalf of an enterprise, an offer made by a third party to enter into a standard contract with that enterprise. Also, a contract may, under the relevant law, be concluded in a State even if that contract is signed outside that State; where, for example, the conclusion of a contract results from the acceptance, by a person acting on behalf of an enterprise, of an offer to enter into a contract made by a third party, it does not matter that the contract is signed outside that State. Also, a person who negotiates in a State all the elements and details of a contract in a way binding on the enterprise may be said to conclude the contract in that State, even if the contract is signed by another person outside that State”.

And furthermore:

“The phrase ‘or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise’ is directed at situations where the conclusion of a contract results directly from the actions that the person performs in a Contracting State on behalf of the enterprise, even though, under the relevant law, the contract is not concluded by that person in that State. Whilst the phrase ‘concludes contracts’ provides a relatively well-known test based on contract law, it was considered necessary to supplement that test with a test that focuses on the substantive activities taking place in a State in order to address cases where the conclusion of contracts is clearly the direct result of those activities, even though the relevant rules of contract law provide that the conclusion of the contract takes place outside that State”.

In this regard, the Spanish Tax Authorities have stated, for example, that:

“In particular, in accordance with the commentaries to Article 5 of the OECD Model Convention, if the consultant is authorised to negotiate all the elements and details of a contract that is binding on the British company, it may be considered that he is authorised to conclude contracts in Spain on behalf of that company, even if the contract is ultimately signed by another person in the United Kingdom.” (CV723-03).

“If, as stated in the written consultation, the person hired for the representative office in Spain lacks all types of powers, and is solely engaged in advertising, showing products and providing information to potential customers, the company cannot be considered to be acting in Spain through a permanent establishment, provided that such activities are preparatory or auxiliary in nature with respect to the company’s main activity and do not constitute part of the main activity of the company itself.” (CV1025-02).

2.- PE and VAT

The existence of a PE must also be analysed from the VAT perspective. In this regard, as the Court of Justice of the European Union has clearly stated, the concepts and definitions used in double taxation conventions cannot be transposed to the VAT regime because they are different taxes.

“It should be noted that the OECD Convention is irrelevant since it concerns direct taxation, whereas VAT is an indirect tax” (Case CJEU C-210/04).

This means that, in principle, a PE could exist from the VAT perspective but not from the NRIT perspective, and vice versa.

Definition of PE under VAT

The concept of PE is contained in Art. 69, paragraph 3, number 2 of Law 37/1992 on VAT.

In this regard, the AEAT has stated that this provision must be interpreted in the light of the case law of the Court of Justice of the European Union, in particular the judgments of 4 July 1985, Case 168/84, Gunter Berkhol; 2 May 1996, Case C-231/94, Faaborg-Gelting; 17 July 1997, Case C-190/95, ARO Lease BV; 20 February 1997, Case C-260/95, DFDS A/S; and 28 June 2007, Case C-73/06, Planzer Luxembourg.

And that, according to this case law, for a permanent establishment to exist, it is necessary for there to be an adequate structure in terms of human and technical resources, whether owned or subcontracted, with a sufficient degree of permanence.

This same criterion has been enshrined in Council Implementing Regulation (EU) No 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax (OJ of 23 March) in its Article 11, which defines the permanent establishment as “any establishment, other than the place of establishment of a business referred to in Article 10 of this Regulation, characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs” (CV0220-22).

In the same consultation, the AEAT recalled that a business or professional will have a PE where it has premises (warehouses) as owner, holder of a right in rem to use or lease the whole or a fixed and determined part thereof, and operates such premises with the necessary own technical and human resources.

Furthermore, similarly to what has already been seen for the definition of PE for non-resident income, the existence in Spanish territory of agents or representatives authorised to contract in the name and on behalf of the foreign company in Spain could also be another indicator of the existence of a PE.

And to that effect, it is not essential that employees of the foreign company be present in the territory; it is possible for the foreign company to use external workers, for example from a subcontractor or a subsidiary.

On this point, we can refer to a ruling of the Regional Economic-Administrative Court of Murcia (TEAR), which confirmed the actions of the AEAT that had found the existence of a PE of an Italian company that, in fact, negotiated and contracted with its customers in Spain through the employees of a Spanish subsidiary (TEAR Murcia 31/05/2021, ruling 30/04749/2017/00/00). The TEAR, on this occasion, recalls that, in line with the provisions established by the CJEU, the economic reality must always be taken into account and analysed, since on the one hand it is necessary to examine the different circumstances of each case in order to determine whether we are in the presence of one or another of the situations that may give rise to the existence of a PE.

On the other hand, it may happen that the formal reality established between the parties, the established and non-established operators, is one that does not allow the former to be classified as a permanent establishment of the latter and yet the underlying economic reality is quite different, in the sense that the established subject, even though it does not appear as the supplier or provider of the service, being an independent representative, nevertheless carries out the conclusion of the contract with the customer under a regime of dependence on the non-established operator, not merely putting the parties in contact or performing auxiliary or preparatory tasks ancillary thereto.

The consequences of having a PE in Spain

As already stated from the NRIT perspective, having a PE in Spain allows the income produced in the territory to be subject to taxation in Spain.

Therefore, taxable persons must periodically file the self-assessments provided for non-resident income (forms 200 and 202).

Meanwhile, from the VAT perspective, in the event that a PE exists, the taxable person must comply with all the obligations provided for in the Law and in particular those established in Art. 164.1 of the VAT Law.

Obviously, failure to comply with tax obligations, and above all failure to issue invoices with VAT for transactions carried out in Spain through a PE, exposes the foreign company to very significant tax contingencies that will cover, at a minimum, the last 4 non-statute-barred tax years.

The hiring of logistics services and the existence of a PE

When logistics services are contracted, the foreign company will generally not come to have a “fixed place of business” in Spain because there will be no specific or particular rented place or space.

Normally, the products of the foreign company will be stored wherever the logistics operator considers appropriate and may be moved at any time if the contractor deems it convenient.

There will also be no space available to the employees or representatives of the foreign company, since any visits to the logistics operator’s facilities will need to be authorised. Therefore, it will not be possible for the foreign company to carry out its activity within the logistics provider’s premises.

These concepts have recently been set out in a binding ruling of the AEAT:

“On the basis of the above, the first possibility of a permanent establishment existing in Spanish territory is that SDin has at its disposal in Spain, by any title, on a continuous or habitual basis, installations or workplaces of any kind. That is to say, that it has a place or installations where it carries on all or part of its activity, with a sufficient degree of permanence.

In this case, the contract signed between SDin and the logistics company indicates that (i) in no case is the existence of any right in rem to use and enjoy any particular part of the warehouses where the products are located contemplated, the logistics entity being obliged to provide the necessary space without further specification, and that (ii) SDin’s workers may only access the warehouse accompanied by another person from the logistics company’s staff with prior notice.

Consequently, in accordance with the terms of the contract, the installations/warehouses of the independent logistics operator contracted in Spain are not at SDin’s disposal, which is exclusively the recipient of logistics services, and therefore in these circumstances it will not have a habitual workplace for the purposes of the NRIT Consolidated Text.

In other words, in Spain, the consultant SDin merely receives logistics services provided by an independent company, with which it contracts these services, without having any premises at its disposal to carry out all or part of its activity by itself, with its own staff.

Secondly, a permanent establishment may exist in Spain by virtue of having an agent: … In this case, it appears that the Spanish logistics company is contracted exclusively to carry out its own logistics activity, without acting at any time in the name and on behalf of the consultant, and therefore it does not appear that this company acts as an agent of SDin” (CV0452-23).

In light of all of the above and taking into account the AEAT’s criteria, we can conclude that the mere contracting of typical logistics services in Spanish territory does not entail the existence of a PE.