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VAT and corporative tax for permanent establishments; Different approaches

A closer focus on the structure titled as Permanent Establishment shows that, according to Tax Office regulations, the stipulations referred to VAT and to corporative tax applicable, are not the same. Although our previous post describes the feature of a Permanent Establishment and its tax obligations, the Value Added Tax compliance requires a closer review.

VAT and corporative tax for permanent establishments

Taxation of VAT may apply on Permanent Establishments; however, Corporate Tax is based on criteria of international treaties and agreements.

Article 84 of Law 37/1992 on value added tax defines as taxpayers: 'On purpose of this Article, taxable persons are those established in the territory of application of the tax if they have their place of business, their domicile for tax purposes or a permanent establishment involved in supply of goods and services subject to the tax. Such a fixed establishment is supposed to carry out supply of goods or services, arrangement of materials or human factors of production on purpose of carrying out each supply. Formerly, the law defined in its article 69: "Permanent establishment: any fixed place of business where entrepreneurs or professionals carry out business or professional activities".

Therefore, a taxpayer for VAT purposes is titled as such, when supply of goods or services is involved. However, when referring to Corporate and Non-Resident Income Tax, then the definition given by the Double Taxation Agreement between Spain and the relative country will apply. This definition, depending on the country, may explicitly exclude certain cases such as Permanent Establishment. For example, asset depots, warehouses or similar. These, according to directives of the VAT law, may be considered as Permanent Establishment for the purposes of this tax.

It certainly would imply formal obligations when it comes to pay corporate and non-resident income tax in Spain. Even though they may not include the obligations of a Permanent Establishment. This may not be the norm, but when it comes to set-up certain "premises" in a foreign country (or acting in Spain as a foreign company), it is recommended to ensure that compliance with current legislation is fulfilled.

If you manage a Permanent Establishment in Spain or out of Spain, contact us. We can assist you on any legal requirements.

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