Concept of branch
A branch is legally defined as a secondary establishment that has been granted certain management autonomy and permanent representation, which entirely or partially develops its parent Company’s activities. Royal Decree 1784/1996 of 19 July 1996, which approves the Regulation of the Commercial Register, namely in articles 295 and the following regulates branches in Spain.
Ultimately, branches are establishments of a fixed nature, set up by a non-resident parent Company with the purpose of carrying out its economic activities on Spanish territory. They lack legal personality unlike subsidiaries and are subordinated to their parent Company. Therefore, a branch does not constitute an independent and separate entity, but a mere extension of its parent Company on Spanish territory.
Main Characteristics of a branch
The main characteristics of a branch can be summarized as followed:
- It is an establishment which lacks its own legal personality. The parent company keeps hold of the legal personality.
- It is a secondary establishment subordinate to the main or parent company, even though it has certain management autonomy, meaning that it has its own organization and management body with enough powers to carry out economic activities and attend its own clientele.
- The social purpose of the parent Company and its branch are identical, albeit the latter usually carries out only certain specific activities of its parent Company.
- The liability of a branch is not independent from its parent Company. The latter can unrestrictedly be held liable for all contracted obligations of its branch.
- A branch does not require a minimum share capital, unlike a subsidiary.
- The legal representative or representatives appointed by a parent company act as agents and manage the branch. However, there are no formal administrative bodies, as in a subsidiary.
- A branch must keep its own accounting for the activities it carries out. Additionally, the foreign parent company is obligated to record in the Spanish Commercial Register its annual accounts prepared according to the applicable foreign legislation.
Steps for setting-up a branch
The procedure for setting-up a branch in Spain is very similar to the one for setting-up a subsidiary and could be carried out in approximately six to seven weeks.
First, a set of duly legalized documents, translated to Spanish by a sworn translator, is required. Namely, the agreement of the governing body of the foreign parent Company approving the setting-up of the Spanish branch and the current bylaws of the foreign parent Company, as well as documentation proving the parent Company’s existence.
Afterwards, a series of ordinary formalities are to take place, such as: obtaining the certificate of designation of the branch, applying for a Tax Identification Number for the branch before the Spanish Tax Agency, granting of the public deed of incorporation of the branch before a Notary, paying off the Property Transfer taxes and Stamp Duty, declaring the foreign investment before the Register of the Directorate General for Trade and Investment of the Ministry of Economy and Competitiveness, submitting the deed of incorporation for registration in the corresponding Commercial Register and finally, completing a series of census procedures for tax and labour purposes.
It should also be noted that once the branch is set up and registered, the branch will be obligated to reflect a series of subsequent acts in the Commercial Register with regards to its foreign parent Company. Among others, the change in the name or place of business, the renewal, appointment and dismissal of its directors, dissolution, the appointment of liquidators, the end of liquidation and the bankruptcy or insolvency of the parent Company.
Applicable tax regime to branches
Regarding the applicable tax regime to a Spanish branch, the rules of the Double-Taxation Agreement apply, if such agreement exists. In the absence of such agreement, the branch is taxed based on the Income of Non-Residents for all the income obtained in Spain, the applicable general tax rate being 25%. The following are considered branch income:
- The income from economic activities or operations undertaken by the branch.
- The income derived from assets related to the branch.
- The capital gains and losses derived from the assets related to the branch.
Assets related to the branch are considered to be those which are functionally related to the development of the relevant activity of the branch.
Finally, a number of peculiarities in determining the tax base of a branch should be taken into account:
- payments made by the branch to the parent company in the form of royalties, interests or commissions, compensation for technical assistance or use of property or rights are not deductible;
- reasonable management and general administration expenses of the branch are deductible if certain requirements are met; and
- the branch can offset their negative tax bases obtained in previous tax years.
This article is not considered as legal advice