Subsidiaries and Permanent Establishments: Keys for Companies in Spain and Abroad
When a company decides to expand its activity, either within its country or internationally, it has two main options to structure this expansion: subsidiaries and permanent establishments. Each of these figures has advantages, limitations and legal particularities that should be analyzed. This article delves into their differences and how they are applied in corporate law both in Spain and abroad.
What is a subsidiary?
A subsidiary is a commercial company with its own legal personality that a parent company creates to operate in a different region or country. In Spain, they are usually incorporated as a Limited Company (SL) or a Public Limited Company (SA), although their form may vary depending on the laws of the destination country. Subsidiaries operate autonomously from the parent company, allowing them to make decisions tailored to the local environment.
Advantages of subsidiaries:
- Independent legal personality: This limits the parent company’s liability to the capital it has contributed to the subsidiary. If the subsidiary incurs debt or faces litigation, these do not directly affect the parent company.
- Local tax benefits: They can access tax incentives specific to the jurisdiction where they operate, as well as benefit from international treaties to avoid double taxation.
- Market adaptation: The subsidiary has more freedom to adjust to local needs and regulations, which makes it easier to establish business relationships and attract customers.
- Operational autonomy: A subsidiary can develop specific strategies and diversify the business group’s activities.
Disadvantages:
- Costs and bureaucracy: Setting up and managing a subsidiary requires additional legal and tax formalities, such as registering with commercial registers and filing annual accounts.
- Duplication of records: Separate accounting records must be maintained, which increases the administrative burden and audit and compliance costs.
- Complex procedures: In the event of liquidation or closure, the process can be long and costly.
What is a permanent establishment?
A permanent establishment is an extension of the parent company that operates in another location without forming a new legal entity. Examples of permanent establishments include offices, warehouses, distribution centers, factories, or even sales representatives who regularly act on behalf of the parent company.
Advantages:
- Less formalities:There is no need to create a new company, which simplifies initial management and reduces the costs associated with setting up a separate entity.
- Centralized control: Since it is not an independent entity, decisions are made directly from the parent company, which guarantees greater alignment with corporate objectives.
- Easy closure: In the event of ending operations at the destination, closing a permanent establishment is usually less complicated than liquidating a subsidiary.
Disadvantages:
- Unlimited Liability:The parent company directly assumes all obligations and debts of the permanent establishment, which may increase financial and legal risk.
- Tax Compliance:Although it does not have legal personality, the permanent establishment must comply with the tax and labor regulations of the country in which it operates, which may create additional complexities.
- Operational limitations:As it is not an independent entity, the establishment may have restrictions on hiring employees or dealing with third parties under local conditions.
Legal aspects in Spain
In Spain, there are specific requirements for both options, which vary depending on the nature of the activity and the model chosen:
- Subsidiaries:
- Registration in the Commercial Registry and obtaining a Tax Identification Number (NIF).
- Compliance with the standards of the General Accounting Plan (PGC).
- Presentation of annual accounts, management reports and, in some cases, mandatory audits.
- Appointment of administrative bodies, such as directors or managers, to act on behalf of the subsidiary.
- Permanent establishments:
- Registration with the Tax Agency to obtain a Tax Identification Number.
- Obligation to keep a detailed record of income and expenses related to its activity.
- Local tax declaration and compliance with labor obligations in case of hiring staff.
International aspects
The decision between a subsidiary and a permanent establishment also depends on international tax factors, such as double taxation treaties, trade agreements and local regulations. Some key points are:
- Taxation: In countries with tax treaties with Spain, permanent establishments are usually taxed only on income generated in that territory. On the other hand, subsidiaries are taxed as independent entities, which can open up opportunities to optimize the tax burden.
- Profit transfer: Subsidiaries may distribute profits to the parent company in the form of dividends, although this may be subject to withholding taxes depending on the country.
- Local reputation:In some markets, operating as an independent entity (subsidiary) can generate greater trust among local customers and suppliers.
Key factors to decide
The choice between a subsidiary and a permanent establishment will depend on several specific factors:
- Size and duration of operation:For long-term activities with significant investment, a subsidiary is often more suitable. For temporary or exploratory projects, a permanent establishment may be more practical.
- Degree of risk exposure:If the parent company’s liability is to be limited, a subsidiary provides an effective barrier against financial and legal risks.
- Tax implications:Consulting with international tax experts is essential to evaluate the tax obligations and advantages of each model.
- Operating costs: Considering the budget available for the management and maintenance of the structure is crucial to choosing the most efficient option.
Conclusion
Both subsidiaries and permanent establishments are essential tools for business expansion, and each has its own advantages and disadvantages. The decision should be based on a detailed analysis of the company’s needs, the destination country’s regulations, and long-term objectives. Having a team of specialized legal and tax advisors is crucial to ensure the success of the expansion strategy, minimizing risks and maximizing benefits. Proper planning not only ensures regulatory compliance, but also enhances the company’s growth and sustainability in new markets.
