Differences between an affiliated branch office and a subsidiary

Do you want to open a business in Spain? Spain offers many opportunities for foreign business owners 25who want to invest, internationalise their company or enter the Spanish market.

There are several ways to do this. The right option will depend on the activity you want to carry out, the level of presence you need in Spain and the objectives you want to achieve.

A foreign company can operate in Spain through different structures, such as a permanent establishment, a branch or a subsidiary. However, these options do not have the same legal nature. They also involve different tax, corporate and operational implications.

Below, we explain the main differences between a permanent establishment, a branch and a subsidiary. We also review the key points that should be assessed before choosing a structure to operate in Spain.

What is a permanent establishment?

The first point to understand is that the concept of permanent establishment is mainly used for tax purposes. It helps determine when a State may tax the income obtained by a foreign company in its territory.

Under international double taxation treaties, Spain may tax the profit obtained by a non-resident company when it is considered to operate through a permanent establishment in Spain.

The Spanish Tax Agency defines a permanent establishment as a situation in which an individual or legal entity has facilities or workplaces of any kind in Spain, on a continuous or regular basis, where all or part of its activity is carried out.

In addition, a permanent establishment may exist when the entity acts in Spain through an agent who is authorised to contract in the name and on behalf of the non-resident company, and who regularly exercises those powers.

Examples of permanent establishments

In particular, the following may be considered permanent establishments, among others:

• Branches.
• Factories.
• Management offices.
• Offices.
• Shops.
• Quarries.
• Agricultural, forestry or livestcok operations. 

It is important to know that a permanent establishment does not have its own legal personality separate from the foreign company. However, it must comply with certain tax obligations in Spain.

Tax obligations of a permanent establishment

Among other matters, it may be necessary to notify the Spanish Tax Agency of its existence, obtain a Spanish tax identification number (NIF), keep separate accounting records for the transactions carried out in Spain and file the corresponding tax returns.

Normally, this is done through Form 200, with the specific features that apply to income obtained by non-residents through a permanent establishment.

In this regard, Article 18 of the Spanish Non-Resident Income Tax Law establishes specific rules to determine the taxable base of the permanent establishment.

For example, when determining the taxable base, payments made by the permanent establishment to the head office or to other permanent establishments are not deductible when they relate to royalties, interest, commissions, technical assistance services or the use or transfer of goods or rights.

However, a reasonable part of management and general administrative expenses corresponding to the permanent establishment may be deductible, provided that certain requirements are met. These include:

• The expenses must be reflected in the accounting records of the permanent establishment.
• The amounts, criteria and allocation methods must be included in an information report filed with the tax return.
• The allocation criteria adopted must be rational and applied consistently.

Therefore, a permanent establishment must be analysed with particular care from a tax perspective. It may generate obligations in Spain even if the foreign company has not incorporated an independent Spanish company.

What is a branch?

A branch is a stable form of presence of a foreign company in Spain. Unlike a subsidiary, a branch does not have its own legal personality. Instead, it acts as an extension of the foreign parent company.

This means that the branch carries out activity in Spain, but it remains legally dependent on the foreign company. Therefore, the parent company remains responsible for the obligations arising from the branch’s activity.

A branch may be useful when a foreign company wants to operate in Spain with a stable structure, but without incorporating a new Spanish company.

However, creating and operating a branch involves tax, accounting, registry and representation obligations. These should be analysed before starting the activity.

In practice, a branch usually requires a public deed, registration with the Commercial Registry, a Spanish tax identification number and the appointment of a representative or authorised person in Spain.

What is a subsidiary?

A subsidiary is a commercial company incorporated under Spanish law and wholly or partially owned by a foreign company.

One of the main differences between a subsidiary and a branch is that a subsidiary does have its own legal personality, separate from the foreign company that acts as its parent company.

Therefore, even if it is 100% owned by a foreign company, the subsidiary is an independent Spanish entity from a legal perspective.

To incorporate a subsidiary, it is necessary to execute a public deed of incorporation and register the company with the Commercial Registry.

In addition, the subsidiary must comply with the obligations that apply to any Spanish commercial company. These include keeping accounting records, legalising company books and preparing, approving and filing annual accounts.

The main advantage of a subsidiary is that, as it is legally independent from the parent company, it can limit the risk assumed by the foreign company. In principle, liability is linked to the subsidiary itself, although there may be specific cases in which the parent company can be liable through other legal routes.

From a tax perspective, the subsidiary will be taxed in Spain on its profits under Spanish Corporate Income Tax. In addition, the distribution of dividends to the parent company must be analysed in light of Spanish regulations, the parent company’s country of residence, double taxation treaties and, where applicable, EU rules.

Differences between a branch and a subsidiary

There are many differences between a branch and a subsidiary. The most important ones are explained below.

Legal personality

A branch does not have its own legal personality. It depends on the foreign parent company and acts as an extension of the non-resident entity in Spain.

A subsidiary, on the other hand, does have its own legal personality. It is incorporated as an independent Spanish commercial company, even if it is wholly or partially owned by a foreign parent company.

This difference is key. It affects liability, decision-making, corporate obligations and the way the business operates in Spain.

Minimum share capital

No minimum share capital is required to create a branch, because no new independent company is being incorporated.

In contrast, a subsidiary must comply with the minimum capital required for the type of company chosen.

In the case of a Spanish limited liability company, the minimum share capital may be 1 euro. However, when the capital is below 3,000 euros, special rules apply.

In the case of a Spanish public limited company, the minimum share capital is 60,000 euros.

The limited liability company and the public limited company are two of the most common types of commercial company in Spain. In practice, however, the limited liability company is usually the most widely used form for subsidiaries of foreign companies, due to its flexibility and lower capital requirement.

Ownership of the entity

In the case of a subsidiary, the owner or shareholder may be an individual or a foreign company.

If the shareholder is a foreign individual, they will normally need a Foreigner Identification Number (NIE). If the shareholder is a foreign company, it must obtain a Spanish tax identification number (NIF) in order to participate in the Spanish company.

In the case of a branch, ownership corresponds directly to the foreign parent company, as the branch is not an independent entity.

Liability of the parent company

In the case of a subsidiary, liability is, in principle, limited to the assets of the subsidiary itself because it is an independent entity. This makes it possible to legally separate the activity carried out in Spain from the foreign parent company.

In the case of a branch, the situation is different. Since there is no separate legal personality, if the branch incurs debts or obligations, the parent company must assume the corresponding liability.

For this reason, liability is one of the most important factors when deciding between creating a branch or a subsidiary in Spain.

Governing bodies

A subsidiary, like any Spanish commercial company, must have governing bodies. These include the General Meeting and the management body.

The management body may take different forms:

• Sole director.
• Two or more joint and several directors.
• Two or more joint directors.
• Board of directors.

In the case of a branch, there is no governing body equivalent to that of a Spanish commercial company, as it depends on the foreign parent company.

Generally, the branch acts in Spain through a legal representative or authorised person of the foreign company.

Annual accounts

A subsidiary must prepare, approve and file its own annual accounts with the Spanish Commercial Registry. These accounts are public and may be consulted by third parties, including clients, suppliers or competitors.

In the case of a branch, accounting and registry obligations have specific features. A foreign company with a branch in Spain must comply with the applicable registry obligations, including the filing of the accounts of the foreign company or the documentation required under Spanish corporate law.

Therefore, before choosing between a branch and a subsidiary, it is also advisable to analyse the level of transparency, reporting and registry publicity involved in each option.

Tax obligations

Regarding tax obligations, both a branch and a subsidiary may have to declare and pay taxes in Spain. However, they will do so under different regimes.

A subsidiary will be taxed as a Spanish company under Corporate Income Tax. Where applicable, it must also comply with VAT, withholding tax, related-party transactions and other relevant tax obligations.

A branch, on the other hand, will be taxed in Spain on the income attributable to its activity in Spanish territory, under the regime applicable to non-residents operating through a permanent establishment.

In both cases, it will be necessary to analyse the specific activity, the country of residence of the parent company, double taxation treaties, the existence of related-party transactions and the tax obligations arising from the activity in Spain.

Which is better from a tax perspective: branch or subsidiary?

There is no single answer. Each case must be analysed individually.

From a tax perspective, it is advisable to review aspects such as:

• Double taxation treaties between Spain and the parent company’s country of residence.
• Applicable taxation: Corporate Income Tax for the subsidiary or Non-Resident Income Tax with a permanent establishment for the branch.
• VAT and other indirect taxes.
• Related-party transactions and transfer pricing.
• Tax treatment of profit distributions to the parent company.

Non-tax matters should also be assessed, especially liability. In a subsidiary, liability is, in principle, limited to the Spanish company itself. In a branch, the foreign parent company is directly liable for the obligations assumed in Spain.

For this reason, before deciding, it is advisable to carry out a prior analysis of the activity, the group structure and the objectives for establishing a presence in Spain.

Which legal form is best if I want to create a company in Spain?

To choose the best way to create a company in Spain, it is advisable to contact a business consultancy firm that knows Spanish legislation in depth and can find the solution that best fits your case.

The structure you choose for your entity in Spain will depend on many factors, such as the following:

• The activity you are going to carry out. Selling products as a supplier to a Spanish company is not the same as needing a larger structure to project a stronger image and enter the Spanish market through a permanent establishment.
• The hiring of employees. You may only need a sales representative or company representative in Spain, or you may want to have a full workforce.
• The business volume. Perhaps, initially, you can operate with a Spanish tax identification number and later decide to create a branch or subsidiary.

In short, the situation must be studied carefully in order to choose the best structure for your entity. With the right planning, you can start doing business in Spain in a short period of time.

How we help you operate in Spain

At LEIALTA, we support foreign companies and international groups that want to establish themselves, operate or develop their activity in Spain.

Our team analyses each case from a legal, tax, accounting and labour perspective. We assess which structure may be most suitable based on the activity, the country of origin, the business volume, the liability the company wishes to assume and its expansion objectives.

If you are considering operating in Spain, you can consult our service for creating a company in Spain or our guide on legal and tax representation in Spain.