When does a foreign company create a permanent establishment in Spain?

A US software company assigns one of its sales managers to Spain for 18 months. No office is rented. No Spanish company is incorporated. The manager works from home and signs contracts on behalf of the US parent. Eighteen months later, Spain’s tax authority asserts that the US company has been operating through a permanent establishment in Spain — and demands corporate income tax on the profits attributable to that activity, plus late payment interest and penalties. This scenario is one of the most common and costly surprises in international tax. Here is what triggers it — and what does not.

A permanent establishment (PE) — known in Spanish as establecimiento permanente — is the legal concept that determines when a foreign company has a taxable presence in Spain, even without incorporating a local entity. Once a PE exists, Spain has the right to tax the profits attributable to it under its domestic law and the applicable double taxation treaty. Understanding when a PE is created is essential for any foreign business with activity in Spain.

The two main types of permanent establishment in Spain

1. Fixed place of business PE

The most traditional form: a foreign company has a PE in Spain if it has a fixed place of business through which it carries on its business — wholly or partly. This includes:

• A place of management or registered office in Spain
• A branch (sucursal) in Spain
• An office — even a home office used exclusively for business purposes
• A factory, workshop, or production facility
• A mine, oil or gas well, quarry, or other place of natural resource extraction
• A building site or construction or installation project — but only if it lasts more than 12 months (the OECD standard threshold, which Spain follows in most of its treaties)

The key word is ‘fixed’ — the place must have some degree of permanence and must be at the disposal of the foreign company. A hotel room used occasionally during business trips does not create a PE. A serviced office used regularly and exclusively by the company’s employees may well do.

2. Dependent agent PE

A foreign company also has a PE in Spain if a person — an agent — acts on its behalf in Spain and habitually exercises authority to conclude contracts in the name of the company. This is the dependent agent PE, and it is the most frequently disputed and misunderstood form.

Key conditions for a dependent agent PE:

• The agent must be legally or economically dependent on the foreign company (not an independent broker or agent acting in the ordinary course of their own business)
• The agent must habitually — not just occasionally — exercise the authority to bind the company
• The agent’s activity must go beyond preparatory or auxiliary functions

What does NOT create a permanent establishment in Spain?

Spain’s domestic law and its tax treaties include a list of activities that are specifically excluded from PE status, even if conducted through a fixed place:

• Using facilities solely for storage, display, or delivery of goods belonging to the company
• Maintaining a stock of goods solely for processing by another enterprise
• Maintaining a fixed place of business solely to purchase goods or collect information
• Maintaining a fixed place of business solely to carry on preparatory or auxiliary activities
• Any combination of the above activities — provided the overall activity remains preparatory or auxiliary

However, the OECD BEPS Action 7 reforms — which Spain has incorporated — tightened the anti-fragmentation rules. Artificially splitting activities between related entities to avoid crossing the PE threshold is now specifically targeted.

Common situations that create PE risk in Spain

Remote employees in Spain

An employee of a foreign company working from Spain — whether temporarily relocated or permanently based there — does not automatically create a PE. But if that employee has the authority to conclude contracts on behalf of the foreign company, or if the company provides them with dedicated office space in Spain, a dependent agent or fixed place PE may arise. The longer the employee works from Spain and the more authority they have, the higher the risk.

Spanish sales representatives

A Spanish sales agent who exclusively represents a single foreign company, receives a fixed salary rather than commission, follows the company’s instructions on pricing and terms, and signs contracts on the company’s behalf is very likely to constitute a dependent agent — creating a PE.

An independent commercial agent who represents multiple companies, sets their own methods, and bears their own commercial risk is far less likely to create a PE.

Construction and installation projects

A building site, construction, or installation project creates a PE in Spain only if it lasts more than 12 months. This 12-month threshold is measured per project — deliberately splitting a single project into multiple contracts to stay below the threshold is an anti-avoidance scheme that the AEAT actively challenges.

Digital economy and server presence

Spain follows the OECD position that a server located in Spain can constitute a PE if it is used to carry on core business activities in Spain (not merely storage or auxiliary functions). Cloud computing arrangements — where the company does not own or control the server — generally do not create a PE. Physical server ownership in Spain is a different matter.

Tax consequences of a permanent establishment in Spain

Once a PE exists, the consequences are significant:

• The profits attributable to the PE are subject to Spanish corporate income tax at 25%
• The PE must register with the Spanish Tax Agency (AEAT) and obtain a NIF
• The PE must file annual corporate income tax returns (Modelo 200)
• Repatriation of profits from the PE to the foreign head office is subject to a withholding tax of 19% under domestic law — reduced or eliminated by the applicable treaty or EU Directives
• The PE may be required to register for VAT (IVA) in Spain
• Failure to register and declare a PE that exists exposes the company to back taxes, interest and penalties for each year the PE was undeclared

Frequently asked questions

How does Spain determine the profits attributable to a PE?

Spain follows the OECD Authorised Approach (AOA), treating the PE as a functionally separate entity and attributing profits as if it were an independent company dealing at arm’s length with the rest of the enterprise. Transfer pricing principles apply to transactions between the PE and the foreign head office.

Can we structure around a PE by using a commission agent instead of a subsidiary?

Commission agent structures — where a local agent sells in its own name but on behalf of a foreign principal — were traditionally used to avoid PE status. Post-BEPS, Spain’s treaties (updated via the Multilateral Instrument, MLI) now include an expanded dependent agent rule that captures agents who habitually play the principal role in concluding contracts, even if they formally sign in their own name. This structure requires careful legal analysis before implementation.

Does a Spanish subsidiary automatically mean no PE risk for the parent?

Not automatically. A subsidiary is a separate legal entity — but if the parent exercises so much control over the subsidiary that the subsidiary effectively acts as its agent in Spain, a PE of the parent may still exist alongside the subsidiary. This is known as a ‘subsidiary PE’ and is increasingly scrutinised by the AEAT.

PE risk is one of the most underestimated tax exposures for foreign companies active in Spain. At Capital Auditors & Consultants, we assess PE risk for international groups, advise on compliant structures, and manage the registration and tax compliance of existing PEs. Contact our international tax team before your Spanish operations expand further.