Foreign Investment in Spain

Spain is one of the most dynamic and attractive economies of Europe and offers a wealth of opportunities for foreign investors, from its extensive real estate market to its geostrategic position as a gateway to European, North African, Middle Eastern and Latin American markets. In this report we describe the key features of the main legal structures available to foreign investors wishing to establish themselves in Spain.

1. Setting up a Spanish company

S.L. (Sociedad Limitada, Limited Liability Company) / S.A. (Sociedad Anónima, Public Limited Company)

Separate legal personality: The liability of the shareholders for any debts is limited to the amount of their capital contributions.
Minimum capital stock: €3,000 for S.L. and €60,000 for S.A.
Formalities for incorporation: Public Deed signed before a Notary + Commercial Register.
Obligation to file annual accounts in the Commercial Register: Yes (for Spanish S.L./S.A.).
Managing and government body: Shareholders’ meeting and the managing body (which can be a sole director, two or more jointly or severally liable directors, or a board of directors with three or more members).
Taxation:
- The rate of Corporation Tax in Spain is, in general, 25% of net profit.
- If the parent company is based in a non-EU country:
  - which does not enjoy a Double Taxation Treaty with Spain, the payment of dividends from the subsidiary to the parent company is subject to a 19% tax in Spain.
  - which does enjoy a Double Taxation Treaty with Spain, dividends are subject to the reduced tax rate provided for in the treaty.
- The interest on loans from the shareholders of a subsidiary is normally tax-deductible for the subsidiary if the transaction is valued on an arm’s-length basis and subject to certain requirements, subject to the limits on deductibility established in corporate income tax legislation.

2. Setting up a Spanish branch (sucursal)

A branch is a permanent establishment, enjoying certain degree of management independence.

Separate legal personality: No.
- Its legal liability extends to the parent company.
- Subordinated to the parent company (legally and economically).
Formalities for incorporation: Public Deed signed before a Notary + Commercial Register.
Minimum capital stock: No capital is required.
Obligation to file annual accounts in the Commercial Register: Yes (for the parent company)
- It must keep separate accounts regarding its activities.
Managing and government body: Director resident in Spain, who is granted power of attorney of the branch.
Tax representative: You will need a representative resident in Spain for tax purposes, who is jointly responsible for the payment of any taxes.
Taxation:
- The income tax rate for the branch in Spain is generally 25% of the net profit.
- If the parent company is based in a non-EU country:
  - and does not enjoy a Double Taxation Treaty with Spain, the remittance of profits from the branch to the parent company will be subject to a 19% tax in Spain.
  - and does enjoy a Double Taxation Treaty with Spain, the remittance of profits from the branch will be tax exempt in Spain under most treaties.
- In practice, it is usually easier for expenses (parent company overheads) to qualify as deductible in the case of a branch, rather than in the case of a subsidiary.
- Interest on loans from a foreign parent company to its Spanish branch is not tax-deductible for the branch.

3. Setting up a permanent establishment

The permanent establishment is a fixed place of business (a centre to carry out the business or a dependent agent).
- A natural or legal person who carries out economic activities is understood to operate through a permanent establishment in Spanish territory when, for whatever reason, they have facilities or workplaces of any kind in Spain, on a continuous or habitual basis, where they carry out all or part of their activity, or they act in Spain through an agent authorised to contract, in the name of and on behalf of the non-resident, who habitually exercises said powers.
- More specifically, the premises that constitute a permanent establishment are: executive headquarters, branch offices, offices, factories, workshops, warehouses, shops or other establishments, mines, petroleum or gas wells, quarries, farms, forest, livestock or other holdings or any other place used for the survey or extraction of natural resources, as well as construction, installation or assembly work with a duration of more than 6 months.

In principle, the activities of a representative office are limited; essentially coordination, collaboration, etc.

Separate legal personality: No.
- Its legal liability extends to the parent company.
- Subordinated to the parent company (legally and economically)
- The permanent establishment is a tax concept for tax benefits in Spain

Formalities for incorporation: Document of parent company deciding to create the permanent establishment. No Commercial Register.

Minimum capital stock: No capital is required.

Annual accounts in Commercial Register:
- It must keep separate accounts regarding its activities.

Managing and government body: (It is the Director of the parent company).

Tax representative: You will need a representative resident in Spain for tax purposes, who is jointly responsible for the payment of any taxes.
Taxation: The income tax for a permanent establishment in Spain is, in general, 25% of the net profit (the same as for a branch).

Real Estate

When setting up a permanent establishment in Spain, a branch or a company, you may choose to acquire real estate.

Formalities: Public deed signed before a Notary + registration in the Property Register.
Taxation:
- Transfer and Stamp Tax (Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados (ITP-AJD) or VAT:
  - The sale of new housing by the developer (first-time handovers of housing) is subject to Value Added Tax (VAT).
  - The sale of second-hand housing by entrepreneurs (second and subsequent handovers of housing) is subject to Property Transfer Tax (ITP).
  - The sale of housing by individuals is subject to Property Transfer Tax (ITP)
  - The purchase of a new home entails the obligation for the buyer to pay Value Added Tax,
  - The tax rates on the sale value:
    - ITP: 8% or 10%; or
    - VAT: 10%, as a general rule
- Real Estate Tax (Impuesto sobre Bienes Inmuebles (IBI)): Annual tax payable by real estate owners. Tax rates of up to 1.30% for urban properties and 1.22% for rural properties based on the cadastral value.
- Wealth Tax (Impuesto sobre el Patrimonio):
  - Non-resident natural persons are taxed only on assets located in Spain or rights exercisable within the country. In the absence of autonomous community regulations, the maximum exemption from Wealth Tax is €700,000.

4. Acquisition of shares of an existing Public Limited Company or of a Limited Liability Company

Formalities: Public deed signed before a Notary + registration in the Commercial Register only in the case of sole partner companies.
Taxation:
- Transfer and Stamp Tax (ITP-AJD):
- Financial Transactions Tax (Tobin Tax): Only in the case of the acquisition of shares in listed Spanish companies with a market capitalisation exceeding 1,000 million euros
  - 2% in respect of the acquisition
  - The tax does not apply to transactions between companies within the same group
  - The taxable party is the acquirer of the shares.

5. Joint venture

A partnership with established businesses in Spain, enabling parties to share risks and pool resources and expertise.
Structures:
- A Temporary Business Association (“Unión Temporal de Empresas” or UTE).
- An Economic Interest Grouping (EIG).
- A silent partnership arrangement unique to Spanish law (“cuenta en participación”) with one or more Spanish entrepreneurs.
- Participating loans.
- Joint ventures formed through Spanish Public Limited Companies or Limited Liability Companies.

The required formalities, legal personality and fiscal obligations would depend on the structure chosen.

6. Agreements

Distribution agreements

The distributor agrees to purchase goods from the other party for resale. Distributors are independent legal entities.

Taxation

The tax treatment of non-residents in Spain who contract with Spanish distributors will depend on whether or not said contracting gives rise to the existence of permanent establishment in Spain for the non-residents:

If a permanent establishment exists, it will be taxed according to the rules on permanent establishments stipulated under the Non-resident Income Tax Law or in the applicable tax treaties.
If a permanent establishment does not exist, it will be taxed pursuant to the rules set out by Non-resident Income Tax Law for taxpayers without a permanent establishment.

Whether or not a permanent establishment exists will depend, in general, on whether the non-resident is deemed to be distributing in Spain through a fixed place of business or an independent agent.