In the current economic context of globalization and internationalization of business, the tax concept of the Permanent Establishment is an essential element in determining which countries may tax business income.
Individuals or legal entities, who are not residents in Spanish territory are tax liable in Spain for the Non-Resident Income Tax when they obtain income in that territory.
In this regard, it is important to make an emphasis on the definition of tax residence of an individual or legal entity in Spanish territory.
Requirements to determine a residency for individuals according to the Personal Income Tax Law:
- To live in the Spanish territory more than 183 days per year.
- To have the center of economic interests in Spain.
- Residence of spouse and minor children in Spain.
Those who do not meet the aforementioned requirements are considered to be non-residents in Spain.
Requirements to determine a residency of legal entities according to the Corporate Income Tax Law:
- Company has been incorporated in accordance with Spanish law.
- The registered office is situated in Spanish territory.
- Business activities are managed and controlled by head office, which is situated in Spain.
The taxation of income obtained in Spain by individuals or entities that are not residents in Spanish territory will depend on whether the income is obtained through a permanent establishment (hereinafter, PE) or without the intermediation of a PE.
What is a Permanent Establishment?
The tax definition of Permanent Establishment will depend on whether the country of residence of the taxpayer who obtains income in Spain as a non-resident has a Double Tax Agreement with Spain or not:
- In the absence of a Double Tax Treaty (DTT) with Spain, in order to define whether the income is obtained through PE or without PE, the definition of PE under Spanish domestic legislation will apply.
- Otherwise, if DTT has been signed between the taxpayer’s country of residence and Spain, the definition of PE will be following Organization for Economic Co-operation and Development (OECD) criteria.
Definition of PE according to the Spanish domestic legislation.
According to the Article 13 of Royal Legislative Decree 5/2004, of Non-Resident Income Tax Law, a non-resident may obtain the status of Permanent Establishment in Spain in two ways:
- Either when, by any legal means, the main business activities take place in the Spanish territory, or business is in Spain.
- When appoint legal person to act by proxy (power of attorney), exercising these powers on a regular basis.
More specifically, the premises that constitute a permanent establishment are:
- Executive headquarters
- Branch offices
- Workshops, warehouses, stores or other establishments
- Petroleum or gas wells
- Farm, forest or livestock exploitations, or other holdings or any other place used for the survey or extraction of natural resources
- Construction, installation or assembly work with a duration of more than six months.
Concept of PE according to the OECD Model Double Taxation Convention on Income and Wealth.
Article 5 of the Model Tax Convention defines the concept of PE as “a fixed place of business through which the business of an enterprise is wholly or partly carried on”.
Requisites to set up a Permanent Establishment (PE):
The existence of a habitual place of business.
According to the OECD, the term PE includes any premises or facilities that are used for economic activity of the enterprise. In particular, the term PE can include:
- Executive headquarters
- Branch offices
- Mines, petroleun or gas wells, quarries or any other place of extraction of natural resources.
- Construction, assembly and installation work with a duration of more than one year
It is not necessary to have a formal legal right (ownership or lease) of use of that place in order to consider that as a Permanent Establishment, it is sufficient that the business activity is carried out in another country.
The place of business is “fixed,” or permanent.
On the other hand, this place of business must be “fixed”; in other words, it must be established in a particular location with a certain degree of permanence.
To carry out professional or business activities.
It is required that the space of the place of business should be used for the development of a business activity. However, the activity does not have to be uninterrupted, although it must take place regularly, since the PE requires a certain permanence.
At ANTEO ETL GLOBAL we can advise you on the taxation of non-residents and help you comply with your tax obligations. If you have any quastion you can contact with our Tax Advisory.