Permanent Establishment in Tax LawAccounting Tax Legal Audit 1

I. IntroductionII. Concept of Permanent EstablishmentIII.ExamplesIV.Determining the taxable basis of the tax V. Formal registration and accounting obligationsVI.ResponsibilityVII.Tax ratesVIII.Bibliography

Permanent Establishment in Tax LawAccounting Tax Legal Audit 2

Non-Resident Income Tax (IRNR)

The IRNR is a direct tax payable according to the income obtained in Spanish territory by non-resident individuals or entities.

The regulation of this tax are gathered in the Consolidated Tax Law, approved by Royal Decree 5/2004 (LIRNR), in force since the 13th March 2004.

The law is developed by Regulation approved by Royal Decree 1776/2004 (RIRNR), in force since the 6 August 2004.

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- A fundamental characteristic of a PE is the absence of a diferent legal status from the one corresponding to the mother company or head office.

- Branches are always permanent establishments but not the other way around.

- The concept of branch and that PE is, normally, equivalent for tax purposes, but legally different.

- Each place is a permanent establishment. Eg: Oil Station.

- Is not possible to combine the results of permanent establishment.

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- In particular, the following are considered to be a PE:

- Place of management, branch offices, factories, workshops, warehouses, shops or other establishments;

- Mines, oil or gas wells or quarries.

- activities involving agricultural, forestry or any other place for exploration or extraction of natural resources.

- works involving construction, installation or assembly project. The duration of which exceeds six months.

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- The following is Not a permanent establishment:

a) the use of facilities only for storage, display or delivery of goods or merchandise belonging to the company.

b) The maintenance of goods or merchandise belonging to the company only for storage, display or delivery;

c) the maintenance of goods or merchandise belonging to the company with the only purpose of these goods being transformed by another company;

d) The maintenance of a fixed place of business only to purchases of goods or merchandise or of collecting information for the enterprise;

e) the maintenance of a fixed place of business for advertising, supplying information, scientific research or for similar activities

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1. An Advertising agency that campaigns for other companies based in Spain. PE

2. Sale of a real estate property once the activity of the permanent establishment has concluded. This is not a PE

3. Warehouse delivery and sale of goods. PE

4. A website is NOT PE according to OECD (Organistation for Economic Co-operation and Devolopment) according to IEF (Instituto de Estudios Fiscales - Fiscal Studies Institute) in Spain a website can be an PE because has a continuous activity and creates a minimum trading volume for a year. PE or not PE A grey area.

5. A Web page hosting SERVER is a PE If the owner of the server is the company. If the server is owned by another company, in this case there would not be a permanent establishment.

6. A Website hosted on a server in Spain is owned by an American company. It‘s PE

7. A Website available in Spain and hosted on a server that is not in Spain. OECD says it is not PE. The IEF believes that in this case it is a PE.

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Would a non-resident person who has leased properties in Spanish territory be considered to be operating from a permanent establishment in Spain?

No, given that pursuant to the Spanish tax regulations, the mere leasing of real estate is not one of the circumstances conceived to be a permanent establishment.

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Revenues (+)

a) The income of PE activity.

b) Income from assignment of assets allocated to the PE.

c) Gains or losses on the sale of assets allocated to the PE.

Deductible expenses (-)

The expenses necessary for the activity (as a resident enterprise)

A reasonable proportion of the costs of management and general administration incurred in the headquarters and corresponding to PE.

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Expenses not accepted

- The payments made to the PE headquarters for royalties, interest, commissions, technical assistance or the use of other property or rights.

- The cost of the equity capital of the headquarters (interest and other financial charges) affect PE directly or indirectly in Spain.

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The PE has the same formal obligations, registration and accounting entities resident in Spain and has to submit to the same tax model.

The PE must separate accounts for their operations and assets.

The financial statement´s notes should include management and administrative expenses charged to the PE in order to be accepted.

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Representatives of the company

Representatives of the company are jointly responsible for the income tax liability of the non resident.

Companies are required to appoint, before the end of the reporting period an individual or legal entity resident in Spain. A breach of the rule is a serious tax offense, and there is a fixed fine of 2.000 euros.

Tax Rate year 2012

Permanent Establishment

Tax for big companies

30,00 %

Tax for small companies with profit of 300.000 euros (*)

25,00 %

Tax for small companies with a profit exceeding 300.000 euros

30,00 %

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VII. Tax Rates

(*) small companies incomes less than 8 milion euros

Type of Revenue

Tax rate Year 2012-2013 without a

permanent establishment

General Type 24,75 %

Seasonal workers 2 %

Workers in diplomatic missions

8 %

Interest and dividends 21 %

Capital gains on sale of assets

21 %

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Its regulation is contained in the Consolidated Tax Law, approved by R.D. Leg 5/2004 (LIRNR), applicable since 13.3.2004.

The law is developed by Regulation approved by Royal Decree 1776/2004 (RIRNR), applicable since 6.8.2004.

http://www.oecd.org Organisation for economic co-operation and development.

http://www.agenciatributaria.es/AEAT.internet/Inicio_es_ES/La_Agencia_Tributaria/Ca

mpanas/No_residentes/No_residentes.shtml Agencia Tributaria Española

http://www.ief.es/ Instituto de Estudios Fiscales.

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VIII. Bibliography

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Questions, Answers, Discussion

Juan Bermudez Claveria

Auditoria Operativa Barcino SLEdificio Financia Calle Mallorca 272 6 4

Tel.: +34 93.272.12.42Email: jbermudez@aobsl.comwww.aobsl.com

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