Expand your business internationally (III): tax differences operating, permanent establishment

Our previous publications did conclude that foreign corporations operating through permanent establishments abroad or in Spain, do entail certain tax obligations. Does this mean that operating without a permanent establishment (performing the main activities of the company without being a representative office) exempts from these obligations? There are certain tax differences when operating with or without a permanent establishment.


General Tax Directorate has recently issued a binding ruling, dated August 2019. It analyses a particular case of non-resident company acting in Spain for certain operations. It does so from the perspective of Non-Resident Income Tax, Personal Income Tax on hired workers and VAT. This consultation clearly evidences various differences in taxation. It further shows formal differences depending on the tax authority’s decision to consider the entity as a Permanent Establishment of the respective country, or not. This post reviews the earlier mentioned eventual differences that could basically occur. Conclusions will depend on the Double Taxation Agreement applicable to each case, moreover the issue will be subject to the type of income.


Tax differences when operating with or without a permanent establishment


NON-RESIDENT INCOME TAX


A non-resident company operating in Spain will be taxed according to business profits obtained in Spain:

  • With permanent establishment: The agreement will mostly state that it is taxed in Spain.

  • Without a permanent establishment: The agreement will mostly state that no tax is payable in Spain.

WITHHOLDING OF TAX APPLICABLE TO INCOME IN CASE OF HIRING WORKERS IN SPAIN


In those cases where the company needs to hire workers for execution of its activity in Spain, the obligation to retain (or not) income tax by the contracting non-resident company depends on the following scenarios:

  • With permanent establishment: The agreement will mostly indicate that the company will be obliged to withhold tax from yield incomes.

  • Without a permanent establishment: The agreement will mostly state that the company will be obliged to withhold tax from yield incomes.

VALUE ADDED TAX (VAT)


If the activity carried out is subject to Value Added Tax in accordance with VAT law, and under the assumption that it is deemed to be provided within the territory of application of the tax under that same law, then the recipient of the sale of goods or services provided by the non-resident company (Spanish company, individuals, another non-resident company with or without a permanent establishment...) must be taken into account:

  • With permanent establishment: This topic will not apply.

  • Without permanent establishment: This topic will not apply.


Conclusion


Subsequently, if we are going to start or carry out activities in a foreign country, then two preliminary issues must be defined. This also applies in Spain, if we are non-residents:

  • Do we have a permanent establishment?

  • Eventual tax implications, in those cases where the tax office in that country considers the opposite.

These tax differences when operating with or without a permanent establishment raise questions. At Carrillo Asesores we can help you. Contact us for bespoke attention to your case.




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