An entity will be understood to operate through a permanent establishment in Spanish territory when, on any basis, it has at its disposal in said territory, continuously or habitually, any kind of installations or workplaces in which it carries out all or part of its activity, or when it acts in said territory through an agent authorised to contract on behalf and for the account of the nonresident entity which habitually exercises such powers.
In particular, it is understood that the following constitute a permanent establishment: management headquarters, branches, offices, factories, workshops, warehouses, shops or other establishments, mines, petrol or gas wells, quarries, agricultural, forestry or livestock operations or any other place where prospecting for or extraction of natural resources takes places, and construction, installation and assembly works the duration of which exceeds 12 months.
When a nonresident entity has several centres of activity in Spanish territory, they will be considered to constitute different permanent establishments and will in consequence be taxed separately, when the following circumstances exist:
- When they carry out clearly distinguishable activities.
- When they are managed separately.
The permanent establishment may offset its negative taxable income in accordance with the provisions of this law but, in no case, will it be possible to offset income between different permanent establishments.
Income from business activities carried out by such permanent establishment.
Income derived from the transfer of assets assigned thereto.
Capital gains or losses derived from the assets assigned to the permanent establishment. Assets functionally linked to carrying out the activity which constitutes the purpose of the permanent establishment will be considered assets assigned to the permanent establishment.
In the case of the re-export of goods previously imported by the same nonresident entity, it will be considered:
- That there has been no change in the net assets, without prejudice to the treatment applicable to payments made for the period of use, in the case of fixed assets imported temporarily.
- That there has been a change in net assets in the case of fixed assets to be used in the activities carried out by the permanent establishment.
- That there has been a negative or positive yield of a business activity in the case of items which are considered to be stocks.
In general, the taxable income of the permanent establishment will be determined in accordance with the rules of the general regime.
Payments made by the permanent establishment to the headquarters or any of its permanent establishments for royalties, interest, commissions, in exchange for technical assistance or for the use of other assets or rights are not deductible.
Interest paid by permanent establishments of foreign banks to their headquarters or to other permanent establishments in order to carry on their activity are deductible.
3.Headquartersï General Expenses
Management and general administrative expenses paid by headquarters will be deductible if:
- They are a reasonable part of the expenses.
- They are reflected in accounting statements.
- They are consistent, through an informative report filed with the return, of the amounts, criteria and modules of distribution.
- The imputation criteria adopted is based on rationality and continuity.
The requirement concerning the rationality of the imputation criteria will be understood to be met when such criteria are based on the use of factors by the permanent establishment and the total cost of such factors.
- Direct costs and expenses.
- Average investment in tangible fixed assets used for business activities.
- Average total investment in items used for business activities.
4.Costs Of Capital
In no case will amounts corresponding to the cost of capital belonging to the entity assigned, directly or indirectly, to the permanent establishment be imputable.
Operations carried out by the permanent establishment with the headquarters of the nonresident entity or with other permanent establishments of the entity, whether they are located in Spanish territory or abroad, or with other companies related to the entity, will be valued at normal market value in accordance with the rules of this law.
DIVERSITY OF ESTABLISHMENTS
1. Do Not Complete A Business Cycle
When no consideration is given in exchange, apart from covering expenses originated by the permanent establishment, and all or part of the products or services are not provided to third parties other than the nonresident entity itself.
B) General Rule
Income and expenses will be valued as performed by related parties in accordance with the rules of this law. The tax liability will be determined in accordance with the rules applicable in the general regime.
In the case when the general rule is non applicable:
Taxable income will be determined by applying the percentage indicated for this purpose by the Ministry of Economy and Finance to the total expenses incurred in carrying out the activity which constitutes the purpose of the permanent establishment.
To this amount, the gross ancillary income which does not constitute its business purpose, such as interest or royalties, will be added, together with capital gains and losses derived from the assets assigned to the establishment.
For the purpose of this rule, expenses will be computed at their gross amount and no reduction or offsetting is admissible.
The gross tax due will be determined by applying the general tax rate to the taxable income and the tax credits and allowances regulated in said general regime will not be applicable.
2. Sporadic activities
Activities consist of construction, installation or assembly works with a duration in excess of 12 months, or temporary or seasonal economic operations, or activities of prospecting for natural resources.
- The general regime provided for permanent establishment.
- In accordance with the provisions for income from business activities obtained in Spanish territory without the intermediation of a permanent establishment.
It is compulsory to apply this system when the permanent establishment does not have separate accounting for income obtained in Spanish territory.
Treaties for avoidance of double taxation are not applicable to income obtained without the intermediation of a permanent establishment.
The option must be declared when registration in the Index of Entities is requested.
The rules on accrual and filing returns relative to income obtained without the intermediation of a permanent establishment.
Taxpayers will be relieved of compliance with the accounting and registration obligations of a general nature.
D) Formal Obligations
Taxpayers must keep the supporting documentation for the income obtained and Corporate Tax payments made, together with, if applicable, the supporting documentation for withholding taxes and payments on account effected and returns relative thereto, at the disposal of the Tax Administration.
They will be obliged to register in the Index of Entities and declare their tax domicile in Spanish territory, together with any changes which may take place.
CONCEPT TAX RATE General 35% Activities of exploration and exploitation of hydrocarbons 40% Complementary taxation when the income obtained is transferred abroad and payment of royalties, interest, commissions, in exchange for technical assistance or for the use of other assets or rights. 25%
Complementary taxation will not be applicable, provided there is reciprocity, to income obtained in Spanish territory through permanent establishments by entities whose tax domicile is in another member state of the European Union.
- Tax credits on double taxation of dividends and capital gains
- Tax credits on investment in Ceuta and Melilla
Common rules for tax credits are applicable as explained in the Corporate Tax Section.
The amount of the taxes withheld for a permanent establishment and any payments on account and partial payments which have been made.
When the withholdings, partial payments and payments on account exceed the amount which results from deducting the mentioned items, the Tax Administration will return the excess ex officio.
The period will coincide with the business year declared by the permanent establishment and may not exceed twelve months.
If no other period has been declared, the tax period will be understood to be the calendar year.
The notification of the tax period must be formulated at the moment at which the first Corporate Tax return is to be filed and remains in effect until it is expressly modified.
The tax period will be understood to have concluded:
- when the permanent establishment ceases its activity.
- when the assignment of the investment which was duly made in respect of the permanent establishment is withdrawn in some other way.
- in cases where the permanent establishment is transferred to another entity and those where the headquarters transfers its residence.
The tax will accrue through the last day of the tax period.
Permanent establishments are obliged to file Corporate Tax returns in the form, place and periods fixed for taxpayers by personal obligation to contribute.
Exception: One month when the following events occur from the date on which the event occurs:
- The permanent establishment ceases its activity.
- The assignment of the investment which was duly made with respect to the permanent establishment is withdrawn in some other way.
- The permanent establishment is transferred to another entity or where the headquarters transfers its residence. Its deregistration from the Index of Entities cannot be authorised until the return has been filed.
Permanent establishments will be obliged to keep separate accounts referring to the operations they perform and the assets assigned to them.
They will be obliged to meet the other accounting, registration or formal obligations applicable to taxpayers by personal obligation.
Permanent establishments will be subject to the general payment on account regime on income received.
They will be obliged to withhold taxes or make payments on account on the same terms as entities taxed by personal obligation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Florentino Carreno on +341 524 7100
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