Spanish tax law · Non-Resident Income Tax · 03

Permanent establishments

Chapter III, articles 16 to 23: what income belongs to a permanent establishment, how its tax base is computed, the payments to head office that are never deductible, the extra charge on profits sent abroad, and when the return is due.

Unofficial English translation from the Spanish by Voixa Consultors S.L. Alexander Baranov is responsible for the translation. Source: Real Decreto Legislativo 5/2004, consolidated text, BOE-A-2004-4527 ↗. Check wording, rates, dates and legal effect against the Spanish original before relying on this reading. Source snapshot: 4 November 2026.

What changes once there is a permanent establishment

A permanent establishment is taxed broadly like a Spanish company: on a net figure, at Corporate Income Tax rates, with accounts, instalments and an annual return. The differences from an ordinary subsidiary are concentrated in article 18, which disallows most payments to head office, and in article 19, which adds a separate charge when profits leave Spain. Those two articles are where almost all the money is.

Article 16. Income attributable to permanent establishments

1. The income attributable to the permanent establishment is made up of the following:

a) Income from the economic activities or operations carried on by that permanent establishment.

b) Income derived from assets connected with the permanent establishment.

c) Capital gains or losses derived from assets connected with the permanent establishment.

Assets connected with the permanent establishment means those functionally linked to the carrying on of the activity constituting its purpose.

Assets representing a holding in the equity of an entity shall be regarded as connected with the permanent establishment only where the latter is a branch registered in the Commercial Registry and the requirements laid down by regulation are met.

For these purposes, assets transferred within the three tax periods following that of their disconnection shall be regarded as connected.

2. In cases of re-export of goods previously imported by the same taxpayer, it shall be considered:

a) That no change in assets has occurred, without prejudice to the treatment applicable to payments made for the period of use, in the case of fixed assets imported temporarily.

b) That a change in assets has occurred, in the case of fixed assets acquired for use in the activities carried on by a permanent establishment.

c) That there has been income, positive or negative, from an economic activity or operation, in the case of items regarded as stock.

Shares belong to the permanent establishment only if it is a registered branch. A permanent establishment that exists in fact but has not been registered as a branch in the Commercial Registry cannot treat holdings in other companies as its assets, whatever its accounts say. That decides where dividends and gains on those holdings are taxed.

The three-year rule closes the obvious escape. Taking an asset out of the permanent establishment and selling it shortly afterwards does not work: a sale within the three tax periods following disconnection is treated as a sale of a connected asset, and the gain stays with the permanent establishment.

Article 17. Several permanent establishments

1. Where a taxpayer has several places of business in Spanish territory, they shall be regarded as separate permanent establishments and taxed separately accordingly, where the following circumstances are present:

a) That they carry on clearly distinguishable activities.

b) That those activities are managed separately.

2. Offsetting of income between separate permanent establishments shall in no case be possible.

Two conditions, and the consequence is permanent. Distinguishable activities and separate management together split one taxpayer into several permanent establishments, each with its own base and its own return. A loss in one can never reduce the tax on another, and under article 19.4 the deductions of one are not transferable to another either. Structuring Spanish operations as a single integrated establishment, where that is genuinely the case, is therefore worth more than it looks.

Article 18. Determination of the tax base

1. The tax base of the permanent establishment shall be determined in accordance with the provisions of the general Corporate Income Tax regime, without prejudice to the following paragraphs:

a) In determining the tax base, payments made by the permanent establishment to the head office or to any of its permanent establishments by way of royalties, interest or commissions, paid in consideration for technical assistance services or for the use or transfer of assets or rights, shall not be deductible.

Notwithstanding the foregoing, interest paid by permanent establishments of foreign banks to their head office, or to other permanent establishments, for the carrying on of their activity shall be deductible.

b) In determining the tax base, the reasonable part of the management and general administration expenses corresponding to the permanent establishment shall be deductible, provided that the following requirements are met:

1. Reflection in the accounting statements of the permanent establishment.

2. Evidence, by means of an explanatory memorandum submitted with the return, of the amounts, criteria and allocation keys.

3. Rationality and continuity of the allocation criteria adopted.

The requirement of rationality of the allocation criteria shall be regarded as met where those criteria are based on the use of factors made by the permanent establishment and on the total cost of those factors.

In cases where it is not possible to use the criterion indicated in the preceding paragraph, the allocation may be made by reference to the ratio of one of the following magnitudes:

Turnover.

Direct costs and expenses.

Average investment in items of tangible fixed assets connected with economic activities or operations.

Total average investment in items connected with economic activities or operations.

c) Amounts corresponding to the cost of the entity’s own capital connected, directly or indirectly, with the permanent establishment shall in no case be allocated to it.

2. The permanent establishment may offset its negative tax bases in accordance with article 25 of the consolidated text of the Corporate Income Tax Act, approved by Royal Legislative Decree 4/2004 of 5 March.

Paragraph 1.a) is the single most expensive line in this chapter. Royalties, interest, commissions, technical assistance fees and charges for the use of assets or rights paid by the Spanish permanent establishment to its own head office are simply not deductible. The group may charge them internally, but Spain will not recognise them in the base. The only exception is interest paid by branches of foreign banks for the purposes of their activity. Groups that fund a Spanish branch with intra-group debt, or licence group intellectual property to it, should expect the charge to be added back.

Head-office overheads are deductible, but the memorandum is a condition, not a formality. A reasonable share of management and general administration costs may be deducted only if it appears in the permanent establishment’s own accounts and an explanatory memorandum setting out the amounts, the criteria and the allocation keys is filed with the return. Allocation must also be rational and applied consistently from year to year. The deduction is routinely lost not because the share was unreasonable but because the memorandum was not filed or the key changed without explanation.

Notional interest on capital is never allowed. Paragraph 1.c) rules out any imputation for the cost of the head office’s own capital tied up in the permanent establishment. There is no Spanish equivalent of a notional interest deduction here.

3. Where the operations carried out in Spain by a permanent establishment do not close a complete commercial cycle giving rise to income in Spain, that cycle being completed by the taxpayer or by one or more of its permanent establishments without any consideration arising, apart from the covering of the expenses incurred by the permanent establishment, and without all or part of the products or services being destined for third parties other than the taxpayer itself, the following rules shall apply:

a) The income and expenses of the permanent establishment shall be valued under the rules of article 16 of the consolidated text of the Corporate Income Tax Act, approved by Royal Legislative Decree 4/2004 of 5 March, with the tax debt determined under the rules applicable in the general Corporate Income Tax regime and under the preceding paragraphs of this article.

b) Failing that, the following rules shall apply:

1. The tax base shall be determined by applying the percentage indicated for these purposes by the Minister for Economy and Finance to the total expenses incurred in carrying on the activity constituting the purpose of the permanent establishment. To that amount shall be added the full amount of ancillary income, such as interest or royalties, which does not constitute its business purpose, and the capital gains and losses derived from assets connected with the establishment.

For the purposes of this rule, the expenses of the permanent establishment shall be computed in full, and no reduction or offsetting shall be allowed.

2. The gross tax amount shall be determined by applying the general rate of tax to the tax base, and the deductions and allowances governed by that general regime shall not apply to it.

The incomplete-cycle regime taxes cost, not profit. A permanent establishment that only performs part of a group’s chain in Spain, and is simply reimbursed its costs, can be taxed on a percentage of its total expenses. Those expenses are counted in full with no reduction or offsetting, ancillary income is added on top, and the deductions and allowances of the ordinary corporate regime are expressly unavailable. A cost-plus Spanish support operation therefore needs its pricing documented under the first rule, or it falls into the second.

4. In the case of permanent establishments whose activity in Spanish territory consists of building, installation or assembly works lasting more than six months, seasonal economic activities or operations, or natural resource exploration activities, the tax shall be charged in accordance with the following rules:

a) As provided for income from economic activities or operations obtained in Spanish territory without a permanent establishment in articles 24.2 and 25, the following rules applying for these purposes:

1. The rules on accrual and filing of returns shall be those relating to income obtained without a permanent establishment.

2. Taxpayers shall be relieved of compliance with accounting and registration obligations of a general nature. However, they must keep and hold at the disposal of the tax authorities the supporting documents for the income obtained and the payments made under this tax, and, where appropriate, for the withholdings and payments on account made and the returns relating to them.

They shall likewise be obliged to file a census return and to declare their tax domicile in Spanish territory, and to notify any changes in that domicile or in the data entered in that return.

b) However, the taxpayer may opt to apply the general regime provided for permanent establishments in the preceding articles.

In any event, application of the system indicated in paragraph a) above shall be compulsory where the permanent establishment does not keep separate accounts of the income obtained in Spanish territory.

The option must be exercised at the time of filing the census return for the commencement of activity.

c) The rules laid down in double taxation conventions for cases of income obtained without a permanent establishment shall in no case apply to taxpayers following the system provided for in paragraph a) above.

Paragraph 4.c) is easy to miss and hard to undo. A construction or installation site taxed under the simplified method in paragraph a) cannot then claim the treaty rules that apply to income obtained without a permanent establishment. The simplified method borrows the domestic machinery for non-PE income but expressly does not carry the treaty relief that normally goes with it.

The option is exercised once, at the very start. Choosing the ordinary permanent establishment regime must be done when the census return for the commencement of activity is filed. It is not a choice made later with the annual return, and it is not available at all if separate accounts of the Spanish income are not kept.

5. The difference between the market value and the tax value of the following assets shall be included in the tax base:

a) Those connected with a permanent establishment situated in Spanish territory that ceases its activity.

b) Those previously connected with a permanent establishment situated in Spanish territory which are transferred abroad.

c) Those connected with a permanent establishment situated in Spanish territory which moves its activity abroad.

6. The following shall not be deductible for tax purposes:

a) Expenses corresponding to transactions carried out with the head office or with any of its permanent establishments, or with a person or entity related to that head office or any of its permanent establishments, which, as a result of a difference in tax attribution between the permanent establishment and its head office, or between two or more permanent establishments, do not generate income.

b) Estimated expenses for internal transactions with the head office or with any of its permanent establishments, or those of a related person or entity which, owing to the legislation of the beneficiary’s country or territory, do not generate income, to the extent not offset by income generating double-inclusion income.

The amount of the expenses not deducted by application of the preceding paragraph may be deducted in the tax periods ending within the following three years, to the extent that it is offset by income generating double-inclusion income.

c) Expenses corresponding to transactions of the permanent establishment which are also deductible for tax purposes at the head office, to the extent not offset by income of that permanent establishment or related entity generating double-inclusion income.

The amounts not deducted under the preceding paragraph may be deducted in the tax periods ending in the three years following the end of the tax period in which those expenses accrued, to the extent that they are offset by income of the permanent establishment or related entity generating double-inclusion income.

d) Expenses corresponding to transactions carried out with a permanent establishment of the head office, or of a related person or entity, which, because it is not recognised for tax purposes by the country or territory in which it is situated, do not generate income.

7. For the purposes of paragraph 6, and in any other case of hybrid mismatch governed by article 15 bis of Law 27/2014 of 27 November on Corporate Income Tax that applies:

a) Income is regarded as generating double-inclusion income where it is subject to taxation under this consolidated text and under the legislation of the other country or territory.

b) The reference to related persons or entities shall include, in addition to those laid down in article 15(2) of this consolidated text, the following:

1. An entity holding, directly or indirectly, an interest of at least 25 per cent in the voting rights of the taxpayer, or entitled to receive at least 25 per cent of its profits, or in which the taxpayer holds such interests or rights.

2. The person or entity in respect of which the taxpayer acts together with another person or entity as regards the voting rights or the ownership of its capital, or the person or entity acting together with another as regards the voting rights or the ownership of the taxpayer’s capital. For these purposes the taxpayer or, in the second case, the person or entity, shall be treated as the holder of an interest in relation to all the voting rights or ownership of the capital of the entity or of the taxpayer, respectively, that are owned by the other person or entity.

3. An entity in whose management the taxpayer has significant influence, or an entity having significant influence in the management of the taxpayer. For these purposes, significant influence is regarded as existing where there is the power to take part in the financial and operating policy decisions of another entity, without having control or joint control of it.

The provisions of this paragraph shall likewise apply where the transactions to which they refer take place within a structured arrangement, whether or not they are carried out between related persons or entities.

For these purposes, a structured arrangement means any agreement, legal transaction, scheme or operation in which the tax advantage derived from hybrid mismatches is quantified or taken into account in its terms or consideration, or which has been designed to produce the results of such mismatches, unless the taxpayer or a person or entity related to it could not reasonably have known of them and did not share that tax advantage.

Exit taxation applies on cessation, not only on sale. Under paragraph 5 the unrealised gain on connected assets is brought into the base when the permanent establishment closes, when assets are moved abroad, or when the activity relocates. Nothing has to be sold for the charge to arise. Paragraph 8 allows the tax to be spread over five annual instalments where the destination is in the EU or an EEA State with equivalent mutual assistance on recovery; that relief is lost if the assets are later sold, moved to a third State, or if the taxpayer enters liquidation or insolvency.

8. In the cases provided for in letters b) and c) of paragraph 5, where assets are transferred to a Member State of the European Union or of the European Economic Area that has concluded an agreement with Spain or with the European Union on mutual assistance in the recovery of tax claims equivalent to that provided for in Council Directive 2010/24/EU of 16 March 2010, the taxpayer may opt to pay the resulting tax debt in five equal annual instalments.

The option shall be exercised solely in the tax return for the tax period in which the transfer of assets referred to in letter b) of paragraph 5 takes place, or in the return for the tax period ended on the relocation of the activity in the case provided for in letter c) of paragraph 5, and the first instalment must be paid within the voluntary filing period for that tax period.

Each of the remaining four annual instalments, together with the late-payment interest accrued on each of them, shall fall due and become payable successively, one year after the end of the voluntary filing period for the tax period referred to above.

Except for the particular rules contained in this paragraph, Law 58/2003 of 17 December, the General Tax Act, and its implementing rules shall apply to this instalment arrangement as regards the accrual of late-payment interest and the provision of guarantees. However, guarantees shall be required only where reasonable indications are shown that recovery of the debt could be frustrated or seriously hindered.

The instalment arrangement shall cease to have effect in the following cases:

a) Where the assets concerned are transferred to third parties.

b) Where the assets concerned are subsequently moved to a third State other than those indicated in the first paragraph of this paragraph.

c) Where the activity carried on by the permanent establishment is subsequently moved to a third State other than those indicated in the first paragraph of this paragraph.

d) Where the taxpayer is in liquidation or is subject to a collective enforcement procedure, such as insolvency proceedings, or any equivalent procedure.

e) Where the taxpayer fails to make the payment provided for in the instalment arrangement.

9. In the case of a transfer to Spain of assets, or of a relocation of activities, which under article 5 of Council Directive (EU) 2016/1164 of 12 July 2016 has been subject to exit taxation in a Member State of the European Union, the value determined by the Member State of departure shall be regarded as the tax value in Spain, unless it does not reflect market value.

10. Paragraph 8 of this article shall not apply, and accordingly the difference between the market value and the tax value of the assets transferred shall not be included in the tax base, where those assets are connected with financing or the provision of guarantees, or serve to meet prudential capital requirements or liquidity management purposes, provided that they are expected to return to Spanish territory to be reconnected within a maximum of one year.

Article 19. Tax debt

1. The rate of tax applicable from among those provided for in the Corporate Income Tax rules shall be applied to the tax base determined in accordance with the preceding article.

2. In addition, where income obtained by permanent establishments of non-resident entities is transferred abroad, a supplementary charge shall be payable, at a rate of 19 per cent, on the amounts transferred out of the income of the permanent establishment, including the payments referred to in article 18.1.a) which have not been deductible expenses for the purposes of determining the tax base of the permanent establishment.

The declaration and payment of that supplementary charge shall be made in the manner and within the periods laid down for income obtained without a permanent establishment.

3. The supplementary charge shall not apply:

a) To income obtained in Spanish territory through permanent establishments by entities having their tax residence in another Member State of the European Union, unless it is a country or territory regarded as a tax haven.

b) To income obtained in Spanish territory through permanent establishments by entities having their tax residence in a State that has concluded with Spain a convention for the avoidance of double taxation which does not expressly provide otherwise, provided that there is reciprocal treatment.

4. The allowances and deductions provided for in the Corporate Income Tax rules may be applied to the gross tax amount, giving rise to the net tax amount, which may in no case be negative.

The various deductions and allowances shall be applied according to the circumstances present in the permanent establishment, and those of other permanent establishments of the same taxpayer in Spanish territory shall not be transferable.

5. The amount of withholdings, payments on account and instalment payments shall be deductible from the net tax amount.

6. Where the withholdings, payments on account and instalment payments actually made exceed the net tax amount of the tax, the tax authorities shall refund the excess of their own motion, in accordance with article 127 of Law 27/2014 of 27 November on Corporate Income Tax.

The 19 per cent branch charge catches the payments already disallowed. Paragraph 2 applies the supplementary charge to amounts sent abroad out of the permanent establishment’s income, and expressly includes the article 18.1.a) payments to head office that were refused as deductions. The same royalty or interest can therefore be denied as an expense and then taxed again on its way out.

Most groups never pay it. Paragraph 3 switches the charge off for entities resident in another EU Member State, unless the residence is in a territory regarded as a tax haven, and for residents of treaty States where the treaty is silent on the point and treatment is reciprocal. In practice the charge bites on permanent establishments of entities resident outside the EU in States with no Spanish treaty.

Article 20. Tax period and accrual

1. The tax period shall coincide with the financial year declared by the permanent establishment, and may not exceed 12 months.

Where no other period has been declared, the tax period shall be taken to be the calendar year.

The tax period must be notified at the time when the first return for this tax falls to be filed, and shall be understood to continue for subsequent periods so long as it is not expressly changed.

2. The tax period shall be regarded as ended where the permanent establishment ceases its activity or where the investment previously made in respect of the permanent establishment is otherwise disconnected, and in cases where it moves its activity abroad, where the permanent establishment is transferred to another individual or entity, where the head office moves its residence, and where its owner dies.

3. The tax shall accrue on the last day of the tax period.

Article 21. Return

1. Permanent establishments shall be obliged to file a return, determining and paying the corresponding tax debt, in the manner, at the place and with the documentation determined by the Minister for Finance.

The return shall be filed within the 25 calendar days following the six months after the end of the tax period.

2. Where the cases referred to in article 20.2 arise, the filing period shall be that laid down generally for income obtained without a permanent establishment, running from the date on which the event occurs, and removal from the Index of Entities may not be authorised until that return has been filed.

The deadline is expressed oddly and is easy to miscount. It is not “six months and 25 days” as a single period but the 25 calendar days that follow the six months after the period ends. For a permanent establishment on the calendar year, that places the return in the second half of July.

Closing down does not release you from the return. On cessation, transfer, relocation abroad or death of the owner, the deadline switches to the much shorter one used for income without a permanent establishment, and the entity cannot be removed from the Index of Entities until the return has been filed. A branch cannot quietly be abandoned.

Article 22. Accounting, registration and formal obligations

1. Permanent establishments shall be obliged to keep separate accounts relating to the transactions they carry out and to the assets connected with them.

2. They shall likewise be obliged to comply with the other accounting, registration or formal obligations required of entities resident in Spanish territory by the Corporate Income Tax rules.

Article 23. Payments on account

1. Permanent establishments shall be subject to the Corporate Income Tax withholding regime in respect of the income they receive, and shall be obliged to make instalment payments on account of the assessment of this tax on the same terms as entities subject to Corporate Income Tax.

2. They shall likewise be obliged to operate withholdings and payments on account on the same terms as entities resident in Spanish territory.

A permanent establishment carries the same compliance load as a Spanish company. Separate accounts, the full set of corporate formal obligations, instalment payments during the year and the duty to withhold on its own payments. The only thing it does not have is separate legal personality.

Where this sits

Chapter IV, on the next page, deals with the opposite case: income obtained without a permanent establishment, taxed receipt by receipt, with a narrow list of deductible expenses and a flat rate.

Nothing here is advice on your own position, and this reading is not the official text. Spain publishes no official English version of this Act; where the wording matters to a decision, read it against the Spanish original linked above. Where a double tax treaty applies, article 4 gives it priority, and the treaty definition of a permanent establishment may differ from the domestic one in article 13.