Subsidiary or branch in Spain: how a foreign company establishes its business

A foreign company that decides to operate on a stable basis in Spain has two routes: incorporating a subsidiary, which is a Spanish company it owns, or opening a branch, which is an establishment of the foreign company itself. The choice between a subsidiary or a branch in Spain determines who is liable for debts, what documents are filed with the Commercial Registry and how the profits earned here are taxed. It should therefore be made before the first contract is signed in Spain.

What is the legal difference between a subsidiary and a branch?

A subsidiary is a Spanish capital company, usually a private limited company (sociedad de responsabilidad limitada, SL), whose shareholder is the foreign parent. Under Article 33 of the Spanish Companies Act (Ley de Sociedades de Capital, LSC), it acquires its own legal personality once registered with the Commercial Registry, so it is a separate person from the parent, with its own assets, directors and accounts.

The main consequence is limited liability. Article 1.2 LSC provides that the shareholders of an SL are not personally liable for the company's debts, so the parent puts at risk what it contributes to the subsidiary and not the rest of its assets.

A branch has no legal personality. Article 295 of the Commercial Registry Regulation (Reglamento del Registro Mercantil, RRM) defines it as a secondary establishment, with permanent representation and a degree of management autonomy, through which the company carries on all or part of its business. The foreign company is the one that contracts, invoices and is liable, with all its assets, including for obligations arising from the Spanish business.

How is each one registered with the Commercial Registry?

Incorporating a subsidiary requires a public deed and registration with the Commercial Registry, under Article 20 LSC. Where the parent is the sole shareholder, Article 13 LSC requires its identity to be registered and the single-member status to be stated in the company's documents and invoices. If the company becomes single-member after incorporation, for example because the parent acquires all the shares, Article 14 LSC makes the sole shareholder personally, jointly and severally liable for the company's debts once six months have passed without registering that situation.

A branch is registered with the Commercial Registry of its own address. Article 300 RRM requires the filing, duly legalised, of the documents evidencing the existence of the foreign company, its current articles of association and its directors, together with the resolution establishing the branch. Under Article 297 RRM, the branch's address, activities and permanent representatives, with their powers, are also registered.

In both cases the parent's foreign documents come into play. Article 5.3 RRM allows the company's existence and its representatives' powers to be evidenced by a certificate from its home registry, bearing an apostille or legalised, and Article 37 of the Mortgage Regulation (Reglamento Hipotecario) governs the translation of documents not drafted in Spanish. A branch is therefore no documentary shortcut compared with a subsidiary.

Under Article 279 LSC, a subsidiary files its own annual accounts with the Commercial Registry of its registered office within one month of their approval. A foreign company with a branch, by contrast, must file in Spain the parent's annual accounts and, where applicable, its consolidated accounts, under Article 375 RRM. Those accounts thus become publicly available through the Spanish Registry.

How is a subsidiary taxed compared with a branch?

A subsidiary is tax resident in Spain because it was incorporated under Spanish law, under Article 8.1.a) of Law 27/2014 on Corporate Income Tax (Ley del Impuesto sobre Sociedades, LIS). It pays tax on its profits at the general rate of 25 % set by Article 29.1 LIS. The same provision excludes companies belonging to a group from the 15 % rate for newly created entities, whatever the residence of the other group companies. The reduced scale for turnover below one million euros is measured on the turnover of the whole group, by reference to Article 101.3 LIS. Article 18.1 LIS requires transactions between the subsidiary and its parent to be valued at market value.

Dividends paid by the subsidiary to its parent are income obtained in Spain under Article 13.1.f) of the Non-Resident Income Tax Act (texto refundido de la Ley del Impuesto sobre la Renta de no Residentes, TRLIRNR), and Article 25.1.f) TRLIRNR taxes them at 19 %, subject to the applicable double tax treaty. If the parent is resident in another European Union Member State, Article 14.1.h) exempts the dividends where the holding is at least 5 % and has been held for one year, among other requirements.

A branch, on the other hand, is a permanent establishment: Article 13.1.a) TRLIRNR expressly lists branches as such. Its taxable base is calculated under Corporate Income Tax rules and taxed at that tax's rate, under Articles 18.1 and 19.1 TRLIRNR, with two special features. Article 18.1.a) TRLIRNR disallows payments to head office for royalties, interest, commissions or technical assistance, although Article 18.1.b) allows a reasonable share of management and general administrative expenses. And Article 19.2 TRLIRNR levies a 19 % supplementary tax on income the branch transfers abroad, unless the parent is resident in another EU Member State that is not a tax haven, or in a State with a double tax treaty that does not provide otherwise, on a reciprocal basis, under Article 19.3.

What does day-to-day operation require: tax ID, representative and bank account?

A subsidiary needs its own tax identification number (NIF), which the Spanish Tax Agency assigns within ten days under Articles 18.1 and 24.1 of the General Regulation on tax management and inspection procedures (RGAT). A foreign company operating through a branch is entered in the Census of Businesses, Professionals and Withholding Agents, under Article 3.2 RGAT.

The parent may itself act as director of the subsidiary, appointing a single individual to perform the duties of the office, under Article 212 bis LSC. The position of a director who lives outside Spain is discussed in our publication on non-resident directors of Spanish companies.

A branch also requires a tax representative. If the parent is resident outside the European Union, Article 10.1 TRLIRNR requires it to appoint a representative resident in Spain and notify the Tax Agency within two months; the European Economic Area has its own rules. Article 10.4 TRLIRNR treats failure to do so as a serious infringement, with a fixed fine of 2,000 euros.

To open a bank account, the bank must identify the beneficial owner before starting the business relationship, under Article 4.1 of Law 10/2010 on the prevention of money laundering. In both cases the bank will ask for the parent's chain of ownership up to the individuals who control it.

Which factors decide the choice?

The choice between a subsidiary and a branch depends on four factors:

• Exposure of assets. A subsidiary ring-fences the risk of the Spanish business; a branch passes it in full to the parent.
• Disclosure of financial information, because a branch requires the parent's accounts to be filed in Spain.
• The parent's State of residence, which determines the weight of the supplementary tax or of the withholding on dividends.
• The need to operate with the parent's own standing, for example where contracts or licences must be held in its name.

If a subsidiary is chosen, it is incorporated following the same steps as any SL, which we set out, for non-resident shareholders, in setting up a company in Spain as a foreigner.

Frequently asked questions

Does a branch in Spain have legal personality?

No. It is a secondary establishment of the foreign company, which is the party that contracts and is liable, under Article 295 RRM.

What is the minimum share capital of a Spanish subsidiary?

One euro for an SL, under Article 4.1 LSC, and 60,000 euros for a public limited company (sociedad anónima), under Article 4.2 LSC.

Does a branch pay more tax than a subsidiary?

Profits are taxed at the Corporate Income Tax rate in both cases. The differences lie in the taxation of repatriated profits (withholding on dividends or the 19 % supplementary tax) and in the deductibility of payments to the parent.

How RCM Legal helps you set up a subsidiary or branch in Spain

Two points tend to hold up the process: the parent's documents, which must arrive legalised, translated and consistent with what the Registry and the bank require, and the tax decision, which depends on the home country and the applicable treaty and is hard to reverse once the structure is registered. An unregistered single-member status or a branch without a tax representative create liabilities the company had not anticipated.

At RCM Legal we advise foreign companies setting up in Spain: we analyse the structure, coordinate the parent's documents, incorporate the subsidiary or register the branch, and support you with the subsequent tax obligations. Our commercial lawyers in Murcia work remotely with clients from any country, through our Business 360 service for company set-up and our commercial law practice. Tell us about your project.