You’ve taken the first steps in expanding your business into Spain, perhaps by forming distributor relations. Now, you’re ready to put down deeper roots by renting office space and hiring staff. With these pieces in place you will be considered a “permanent establishment,” and it’s time to go beyond simply registering your foreign business. Foreign companies at this stage in their Spain operations usually benefit from forming one of two types of entities: a subsidiary or a branch office.
Spanish subsidiary and branch office formation share very similar processes, costs and formalities. Both result in granting a public notary deed of incorporation and registration in the corresponding Spanish Commercial Registry, and in both cases you will need to obtain a Spanish NIF number (Foreign Identification Number) from the Spanish Tax administration to register for quarterly VAT payments. Also, Spanish tax, accounting and employment law will apply to your Spain activities in both scenarios.
However, there are a number of differences to consider when choosing which type of entity to form. The most significant is that whereas a subsidiary is an independent local entity, a branch has no legal personality and it is dependent on the parent company. This means your US company will be wholly responsible for the activities of your Spanish branch, including all liabilities and claims.
In addition, opening a Spanish branch office makes tax matters more complex. The branch office qualifies to pay Non-Resident Income Tax, and tax returns must be filed annually. To do this, the foreign parent company must file all relevant foreign tax documents for tax returns in Spain. You will need those documents in certified translation and legalized with a Hague Apostille. With a branch, your parent company will also need to disclose part of its foreign accounting information in Spanish tax filings, which makes the process even more complicated. A subsidiary, on the other hand, will pay corporate income tax in Spain but can deduct payments made to its foreign parent company in the form of royalties, interest or management commissions.
Daily operations are generally much smoother with a Spanish subsidiary. This entity will be completely different from your parent company, handling its own accounting and taxes. Running a Spanish branch, on the other hand, can be quite burdensome. For instance, for any decision to be made for the branch, the board of the parent company will need to formalize the decision via notary public deed. To be recognized in the Spanish registry, this document will need to be translated, notarized and then apostilled pursuant to the Hague Convention. You can avoid this and other time-consuming processes by opting to form a subsidiary company in Spain instead.
Though it has numerous benefits, opening a Spanish subsidiary isn’t without its own drawbacks. First, you will need someone on the ground in Spain – a resident with a tax ID and green card or a local employee – to run your Spain business. This individual will be your appointed Spanish CEO, and will be able to make decisions quickly for the Spanish company. Spanish subsidiaries also have minimum capital requirements, which is not the case for branch offices. However, these formerly high requirements have been lowered to only 3000€ for a limited company. These funds must be paid into a bank account when setting up the entity, but can be used afterward for company operations.
After weighing these pros and cons, around 90% of our clients determine that forming a subsidiary is the best fit for their business needs. Between issues of liability, taxes and overall convenience, it’s easy to see why branch offices are becoming less and less common for foreign companies seeking to grow their businesses in Spain.
