INVESTMENTS BY ENTITIES NOT RESIDENT FOR TAX PURPOSES IN SPAIN WITH A PERMANENT ESTABLISHMENT IN THE CANARY ISLANDS.
A person or entity is considered to operate in Spain through a permanent establishment when it has, on a continuous and habitual basis, premises or places of business of any kind, in which it carries out all or part of its economic activity, or acts there through an agent authorised to contract in its name and on its behalf.
Permanent establishments shall keep separate accounts for the activities carried out in the establishment and for the assets and liabilities assigned to them. In addition, they must comply with the same obligations of a registry or formal nature applicable to entities resident in Spanish territory by the rules of corporate income tax.
In the Canary Islands the established indirect tax is the IGIC and its general rate is 7%. It is settled quarterly, by means of the presentation of a tax form (420) which is the responsibility of the Canary Islands Tax Agency. In any of the three cases described below, this tax will have to be paid.
In any case, any individual or legal entity not resident for tax purposes in Spain must appoint a legal representative or proxy who is resident in Spain so that said representative can interact with the Spanish State administration.
I would like to inform you that in no case will any of the following lose their tax residence in their country of origin, unless they meet the conditions or requirements established in the Tax Law for the purposes of Tax Residence in Spain.
1.- LIMITED COMPANY INCORPORATED IN SPAIN WITH REGISTERED OFFICE AND ECONOMIC ACTIVITIES IN THE CANARY ISLANDS.
This type of company, once constituted by notary and registered in the mercantile register, is taxed at 15% during the first two years and from the second year onwards it will be taxed at 25%.
It is taxed through the Corporate Tax (Form 200) which is filed annually between the 1st and 25th of July.
This type of company can be set up with several partners or with a single partner. The administrator of the company can be a partner of the company or a person designated by the partners to occupy this position.
Both the partners and the administrator can be non-residents for tax purposes in Spain, provided that the company has a legal representative or proxy resident in Spain to represent the company before the Spanish administrative and judicial authorities.
With regard to the benefits available to companies established in the Canary Islands, the following would apply to the Entity in question:
1. The “deduction for investments in the Canary Islands”, which consists of subtracting 25% of the amount of new fixed assets acquired for the exercise of the activity from the adjusted total tax liability (the result of applying the percentage of tax payable (15% or 25%) to the difference between income and expenses), up to a limit of 70% of the total deductions to which the company is entitled. The assets that give rise to this deduction are:
a. Machinery, installations and tools.
b. Information processing equipment.
c. Elements of internal and external transport, excluding vehicles for own use by persons directly or indirectly linked to the company.
The aforementioned goods must represent a clear technological improvement for the company, resulting in a reduction in the unit production cost of the good or service and/or an improvement in the quality of the good or service.
Likewise, the used goods acquired must not have previously benefited from the deduction for investments or from the Investment Allowance Fund scheme (a certificate issued by the transferor to this effect is required).
2. Reserve for Investments in the Canary Islands (RIC)
The RIC will make it possible to reduce the taxable base for Corporation Tax by the amount that these permanent establishments allocate from their profits to the RIC, this reduction not being able to determine a negative taxable base. This deduction will be applied to the allocations made in each tax period to the investment reserve up to the limit of ninety per cent of the part of the profit obtained in the same period that is not distributed.
The application of this tax benefit is incompatible with the deductions for investments described in point one.
In the case of used assets and land, these may not have previously benefited from the above deductions.
Among others, there is a requirement to maintain the assets acquired with these reserves for a minimum period of five years (ten years in the case of land), without being transferred, leased or assigned to third parties.
Exemption on the Acquisition of Real Estate subject to I.T.P. (6.5%) for companies in operation subject to I.G.I.C. tax by means of the assignment of the operation to this tax and in exchange for keeping the property in the possession of the company for a period of 7 years.
2.- COMPANY WITH REGISTERED OFFICE ABROAD AND A PERMANENT ESTABLISHMENT IN SPAIN
In this case, the only obligation to start business activities is to file a census declaration and declare its tax domicile in Spain.
It would have the same rights, obligations and tax benefits as a Spanish company. Permanent establishments will have to keep separate accounts for the activities carried out in the establishment and for the assets and liabilities assigned to it.
It would be taxed through corporate income tax at 15 % for the first two years and at 25 % from the second year onwards.
Note: This document deals with general cases. Each investment will have to be treated in a specific way, taking into account the activity it carries out.