When considering international expansion, Spain often emerges as an attractive destination for businesses due to its strong economy, strategic location, and vibrant market. However, when establishing a business presence in Spain, entrepreneurs often face a critical decision - should they open a subsidiary or a branch?
In this article, we'll delve into each option's key characteristics, tax consequences, legal differences, and liabilities, to assist global entrepreneurs in making an informed decision. Moreover, we'll also touch upon how House of Companies can facilitate a smooth business setup in Spain with its innovative 'Entity Management' solution.
Understanding Subsidiary and Branch: The Basics
A subsidiary is a separate legal entity owned, either partially or wholly, by another company, known as the parent company. In Spain, a subsidiary is treated as a Spanish company, subject to local regulations, and enjoys the right to manage its operations independently.
Contrarily, a branch is not a separate legal entity but an extension of the parent company. It's dependent on the parent company, which is wholly responsible for the branch's activities, including liabilities and claims.
Key Differences between a Subsidiary Company and a Branch Office in Spain
The primary difference lies in their legal status. A subsidiary, being a separate legal entity, can conduct business under its own name, enter into contracts, and is responsible for its liabilities. On the other hand, a branch, with no separate legal personality, operates under the parent company's name and the parent company is accountable for its actions.
In a subsidiary, the liability of the parent company is limited to its financial contribution or the shares it owns. However, in a branch, the parent company bears unlimited liability for the branch's debts and obligations.
A subsidiary is governed by its board of directors, appointed by shareholders. A branch, however, is governed by a representative appointed by the parent company.
Both branches and subsidiaries must pay corporate income tax in Spain. However, a subsidiary, being an independent entity, can deduct payments made to its foreign parent company, offering potential tax benefits.
Tax Consequences of Establishing a Subsidiary or a Branch in Spain
Branches in Spain are taxed under the general provisions of the Corporate Income Tax and must file an annual income tax return. If the branch also qualifies as a permanent establishment for VAT purposes, quarterly VAT tax returns must be filed.
Subsidiaries are taxed on their earnings at a corporate level. Shareholders are taxed on any distributed dividends, although double taxation relief may apply. The subsidiary can deduct payments made to its foreign parent company in the form of royalties, interest, or management commissions.
Legal Obligations and Liabilities of Subsidiaries and Branches in Spain
Both subsidiaries and branches are required to comply with Spanish tax, accounting, and employment laws. They must register with the Spanish Commercial Registry and Spanish Tax Authorities and obtain a Spanish Foreign Identification Number (NIF) for tax purposes.
In a subsidiary, the liability for any debts or obligations lies with the subsidiary itself. The parent company is only liable to the extent of its share in the subsidiary.
However, in a branch, the parent company is fully liable for all debts and obligations of the branch. This means that the parent company's assets could be at risk if the branch incurs significant debts.
Why Choose Subsidiary Registration Over Branch Registration in Spain?
While both options have their merits, a subsidiary generally offers more benefits to businesses planning to operate in Spain for the long term. Here are a few reasons why you might prefer a subsidiary:
A subsidiary operates independently of the parent company, providing flexibility in business operations and decision-making.
The liability of the parent company is limited to its investment in the subsidiary. This protects the parent company's assets from any debts or legal issues the subsidiary may face.
A subsidiary can avail tax deductions on payments made to the parent company, potentially reducing its overall tax liability.
With a subsidiary, you can avoid complex processes associated with a branch, such as the need for the parent company to formalize all decisions via a notarized public deed.
The Role of House of Companies in Entity Management in Spain
House of Companies provides an innovative solution for Entity Management in Spain, empowering global entrepreneurs to register a branch or a subsidiary themselves seamlessly. With our Compliance Calendar, we keep you updated with all necessary compliance requirements, while our Playbooks provide a step-by-step guide on how to deal with Spanish corporate requirements.
Our Entity Management solution is location and agent independent, liberating you from company formation agents and lawyers, and allowing you to manage your company as per your needs.
Whether you're considering a branch or a subsidiary in Spain, House of Companies is here to simplify your business journey and support your global entrepreneurship endeavors.
For more information or to get started with your business setup in Spain, feel free to contact House of Companies today.