Permanent establishment risk in Spain for Indian companies.
The India–Spain convention is a 1993 text, and it is not the OECD model. It creates a permanent establishment in places the model does not, it does so twice as fast, and once one exists it lets Spain reach beyond it.
When does an Indian company have a permanent establishment in Spain?
Through a fixed place of business — including, under this treaty, a premises used as a sales outlet — a project lasting more than six months in any twelve-month period, or a dependent agent who concludes contracts or delivers from Spanish stock. If a PE exists, Spain taxes not only its profits but similar sales made directly from India.
Most PE guidance is written against the OECD Model Convention. For this treaty that shortcut fails three times over. Signed in New Delhi on 8 February 1993, in force 12 January 1995, it reflects a period when India negotiated source-state taxing rights well beyond the model.
What creates a Spanish PE.
| Trigger | Threshold |
|---|---|
| Place of management, branch, office, factory, workshop | None |
| Premises used as a sales outlet | None — not in the OECD list |
| Warehouse renting space to others | None |
| Farm, plantation, mine, quarry | None |
| Installation for natural resource exploration | 3 months |
| Construction, installation or supervisory work | 6 months, aggregated |
| Same, incidental to an equipment sale | Under 6 months if fees exceed 10% of price |
| Services or plant hire, mineral oil prospecting | 30 days |
The pricing trap inside the time rule.
The construction paragraph does not stop at six months. Where the work is incidental to a sale of machinery, a short project is still a PE if the fees for it cross a proportion of the equipment price.
The clause that is absent.
India's treaties with the United States and the United Kingdom contain a service PE clause: furnishing services through personnel beyond a day count creates a PE by itself. Indian outbound planning is built around it.
No service PE clause here
Article 5 contains no provision deeming a PE from furnishing services through personnel, apart from a narrow thirty-day rule for mineral oil prospecting. Engineers deployed to a Spanish client site do not trip an automatic day count.
It runs through fixed place instead
Dedicated desks at a client's premises over a long engagement, or a project office, can amount to a fixed place of business without any services clause. What is removed is the automatic trigger, not the exposure.
Force of attraction.
The most consequential difference, and the one least often explained. Under the OECD model Spain taxes only what is attributable to the PE. Article 7(1) goes further.
Agency, and how wide it reaches.
Consignment stock with a Spanish logistics partner who ships on your instruction sits inside the second limb, whatever the contract calls the relationship. A Spanish agent representing one Indian principal and nobody else is not independent, however the agreement is drafted.
Five situations.
What a PE costs.
| Consequence | Detail |
|---|---|
| Spanish corporate tax | On attributed profits and on profits attracted to the PE. |
| Filing | Registration, corporate returns, VAT where applicable, Spanish accounting. |
| Internal charges | Article 7(3) disallows head office royalties, know-how fees, commission, management charges and — outside banking — interest. A PE cannot be managed down by charging it a fee. |
| Deductible instead | Genuine executive and general administrative expenses incurred for the PE, wherever incurred. |
| Rate protection | Limited. The protocol expressly permits a higher rate on PE profits than on a domestic company's. |
Technical fees: two routes to the same revenue.
Article 13 governs
Spain withholds on the gross fee at the treaty cap. Mechanical, and nothing to file in Spain beyond the withholding.
Article 7 governs instead
Article 13(5) switches off the withholding article. You move to net taxation, filings, attribution — and attraction over similar revenue.
The technical services rate is not the same number on both sides.
The treaty sets 20% on technical fees and non-equipment royalties, 10% on equipment royalties. India invoked the protocol's most-favoured-nation clause by notification in 2024, referencing its convention with Germany, and substituted a 10% cap from Indian assessment year 2024-25. But the Indian Supreme Court held in October 2023 that MFN benefits require a domestic notification and are not automatic — and that notification governs what India charges. Confirm the Spanish position before budgeting a Spanish withholding rate.
The MLI sits on top.
In force for this treaty pair since 1 January 2022, effective from 1 July 2022 for Indian withholding and 1 January 2023 for Spanish withholding and other taxes. It adds a principal purpose test: a benefit can be denied where obtaining it was one of the principal purposes of an arrangement. Thresholds are unchanged; the standing of structures built to sit below them is not.
The structural answer.
The cheapest moment to decide is before the first project.
PE exposure is created by facts — how long, what premises, who signs, how the contract is priced — and each is settled early by people not thinking about Article 5. We review contracts before signature and set up the Spanish entity where one is warranted.
- Permanent establishment
- A fixed place of business, or a deemed presence, giving the source state the right to tax business profits.
- Force of attraction
- Allows the source state to tax similar income earned directly, not only income attributable to the PE. In Article 7(1) here; absent from the OECD model.
- Service PE
- A PE arising from furnishing services through personnel beyond a day threshold. In several Indian treaties. Not in this one.
- Dependent agent
- A person who concludes contracts or delivers from a local stock on the enterprise's behalf.
- Fees for technical services
- Defined in Article 13(4) to include the provision of services of technical or other personnel.
- MFN clause
- Protocol paragraph 7: a rate India later grants an OECD member flows through to this treaty.
- MLI
- The Multilateral Convention, in force for this pair since 1 January 2022.
- Principal purpose test
- Denies a treaty benefit where obtaining it was a principal purpose of the arrangement.
When does an Indian company create a permanent establishment in Spain?
Does sending engineers to Spain create a service PE?
What is force of attraction and why does it matter here?
Three short projects in one year — is that a PE?
Can a short supply-and-install contract be a PE?
Does a Spanish subsidiary create a PE of the Indian parent?
What rate applies to fees for technical services?
Can I charge the PE a management fee to reduce its profit?
What happens if a PE is discovered years later?
India and Spain.
A 1993 treaty, and it is not the model. Read it before you sign.
Book a consultation ↗Alexander Baranov
Seventeen years designing and delivering cross-border corporate structures — incorporation, tax, holding, banking and market entry — for founders and companies expanding into Spain and the EU. Author of professional books on entering the Spanish market.
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