Remote Work Tax Spain
Assess your remote work corporate tax / Permanent Establishment (PE) risks in Spain
Are you planning to hire in Spain?
Launching a remote work policy?
Have your employees already spent time working in Spain?
Or are you wondering whether you should approve a future trip by an employee to Spain?
Through our remote work tax assessment, we cover all angles to ensure you remain compliant for all local regulations and avoid the costly mistake of creating PE in Spain, which leads to corporate tax filing obligations.
How we can help
Schedule a call with our team to investigate the circumstances behind your in-country presence and resulting obligations.
Length of time. Frequency. Seniority of position. Type of work. Industry. Decision making process. Contract execution. IP generation. Data transfer.
All these things need to be considered to understand whether you create PE or have filing obligations.
Key Permanent Establishment tax risks in Spain impacted by remote work
Foreign companies that create a PE in Spain will be subject to Non Resident Income Tax at a 25% tax rate.
Most tax treaties between Spain and other countries contain a definition of PE in line with OECD criteria so that there is an avoidance of double taxation.
In the absence of a double tax treaty (DTT), domestic law states that individuals or companies are considered to operate through a PE when they have work facilities in Spain that are considered continuous or habitual or a place where they perform all or part of their activities, or when they act in Spain through an agent with powers to enter into an agreement in the name and on behalf of the non-resident company/individual, provided that these powers are exercised on a regular basis.
In particular, a PE includes management offices, branches, offices, factories, workshops, warehouses, shops or other establishments, mines, oil or gas wells, quarries, farms, forestry facilities, livestock farms, or any other site where natural resources are collected, and construction, installation, or assembly sites whose duration lasts more than six months.
The Spanish High Court has issued several judgements on the question of PEs where it has adopted a functional approach to the subject of the existence of a PE. In this regard, it has afforded a flexible interpretation of what should be considered a PE, and specifically, of the concepts of dependent agent and fixed place of business.
Turning Permanent Establishment risk into an opportunity in the Canaries
As it has been explained above, PE issue is a very complex matter that, although it has common roots, may vary from country to country. In fact it is not a clear-cut issue so, in some situations, the risk cannot be fully mitigated.
Considering such circumstances, we are of the opinion that an alternative approach can be to embrace the PE issue and take advantage of the PE status in tax friendly jurisdictions. To take just one example, this approach can be implemented in the Canary Islands (Spain) through its ZEC tax regime.
Key Features of the Canaries ZEC Regime
Although the Canary Islands is part of Spain, this territory has special tax incentives approved by the European Union (EU) due to its remote location from the Spanish mainland.
The main features of the ZEC regime are the following:
- The ZEC regime is applicable to entities located in Canary Islands (Spain) and which carry out certain permitted business activities if certain requirements are met (mainly job creation of at least 5 full-time employees and a minimum investment of either €100,000 for Gran Canaria / Tenerife or 3 full-time employees and €50,000 investment in the rest of the islands).
- The ZEC entities would be subject to corporate income tax (CIT) of 4% in comparison to the 25% general corporation tax rate applicable in the rest of Spain.
- ZEC entities are entitled to claim treaty benefits from the Double Tax Treaties (DTT) concluded by Spain.
- ZEC entities have access to EU Directives.
- There is no Withholding Tax (WHT) on dividend payments to non-resident shareholders.
- There is no WHT on interest payments to non-resident entities.
- Capital duty is not applicable for standard company operations (i.e., incorporation, capital increases, capital decreases, etc.) except for the winding up of the entity (i.e., dissolution).
Taking the above into consideration, rather than running away from PE risk, companies might actually decide to embrace PE in the case of the Canary Islands by proactively setting up a branch or a company in the Canary Islands to take advantage of the taxation benefits of this regime. The Canary Islands would then be added to one of the key destinations within a company’s work from anywhere policy. Gran Canaria in this case Ranks 6 in the world on Nomadlist so it should be an attractive destination for employees.
When it comes to the position of the individual employees, there are also tax incentives to consider. Spain offers the so-called in-bound manager regime which means that if an individual becomes tax resident in Spain and has come to this jurisdiction as a result of an employment contract with a Spanish company or a PE in Spain this person would only be taxed for the Spanish sourced income and wealth. In addition, employment income up to €600,000 would be taxed for Spanish Personal Income Tax purposes at a flat rate of 24%.
Read more on the this topic here.