Permanent Establishment in Spain: Risk Assessment for Foreign Businesses

A Permanent Establishment (PE) is a concept in international tax law that defines when a foreign company has a sufficiently substantial and stable connection to a country to be taxable there on its business profits. If a foreign company has a PE in Spain, Spain can tax the profits attributable to that PE at the Spanish corporate income tax rate of 25%.

The concept originates in the OECD Model Tax Convention, Article 5, which defines PE as "a fixed place of business through which the business of an enterprise is wholly or partly carried on." Spain's domestic definition mirrors this in Article 13 of the Non-Residents Income Tax Act (LIRNR): a PE exists where there is a fixed place of business in Spain through which the foreign entity carries on all or part of its activity.

OECD Model Article 5 — The Key Tests

The OECD Model identifies two main pathways to PE status:

• Fixed place of business PE (Article 5.1): A place of management, branch, office, factory, workshop, mine, oil or gas well, quarry or other place of extraction of natural resources — or any fixed place of business through which the enterprise's business is wholly or partly carried on.
• Agency PE (Article 5.5): An agent who habitually exercises authority to conclude contracts in the name of the enterprise, even if no fixed place exists. The 2017 OECD update (reflecting BEPS Action 7) expanded this to agents who habitually play the principal role leading to contracts being concluded, even without formal signatory authority.

The post-pandemic normalisation of remote work has created a significant PE risk landscape. Many foreign companies have employees who relocated to Spain — often with the company's tacit approval — and have been working from home ever since. What began as a temporary arrangement has in many cases become a permanent working pattern, with the employee living in Spain indefinitely and performing their full job function from a Spanish address.

The Spanish tax authority (AEAT) has become increasingly assertive in treating such arrangements as creating a fixed place PE. The key factors AEAT considers are:

• Whether the home office is regularly and habitually used for business purposes (not just occasional working from home)
• Whether the company has any degree of control over the premises (even indirect, such as paying the employee's home internet costs or requiring availability at home)
• Whether the employee performs core income-generating activities from Spain, not just back-office or support functions
• How long the arrangement has been in place and whether it has become the employee's permanent working location

The OECD issued guidance in April 2020 acknowledging that short-term remote working during the pandemic should not create PE risk. However, that guidance explicitly does not cover permanent or indefinite remote working arrangements — the scenario that now applies to most remote workers in Spain.

An Agency PE arises where a person in Spain — whether an employee, contractor or agent — habitually acts on behalf of a foreign enterprise in a way that commits the enterprise contractually. After the 2017 OECD BEPS Action 7 changes (reflected in most modern DTAs and in Spain's domestic rules), the threshold for Agency PE is lower than before:

Pre-BEPS vs Post-BEPS Threshold

Under the pre-BEPS formulation, Agency PE required the agent to have and habitually exercise "authority to conclude contracts in the name of" the enterprise. After BEPS, the threshold extends to agents who habitually play "the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise." This captures commissionnaire arrangements and sales agents who negotiate the terms of contracts even if they do not technically "sign" them.

Practical Examples

• A sales director in Spain who generates leads, negotiates terms and presents proposals that headquarters routinely approves — Agency PE risk even without signatory authority
• An account manager who manages client relationships and recommends contract renewals that are always accepted — Agency PE risk
• A technical consultant in Spain who recommends bespoke solutions that are priced and contracted remotely — may or may not create Agency PE depending on the degree of influence over the final contract
• An independent contractor acting for multiple principals and not exclusively for the foreign company — generally not an Agency PE (the "independent agent" exception), but careful analysis needed

The OECD/G20 Base Erosion and Profit Shifting (BEPS) project — particularly Action 7 on preventing artificial avoidance of PE status — has significantly tightened the PE rules. The key changes that affect foreign businesses in Spain include:

Anti-Fragmentation Rule

Before BEPS, a company could split activities between multiple locations or entities in Spain, keeping each activity below the PE threshold (relying on the auxiliary/preparatory exception for each). The anti-fragmentation rule in the 2017 OECD Model (Article 5.4.1) prevents this: where the overall activities being carried out form a coherent business operation, they must be aggregated for PE analysis, even if carried out through separate locations or entities.

Commissionnaire Arrangements

Pre-BEPS, companies often used commissionnaire structures — where a local entity sells products in its own name but on behalf of a foreign principal — to avoid PE. The agent holds no inventory in its own name, so the fixed place test was harder to satisfy. Post-BEPS, if the local entity habitually plays the principal role leading to the conclusion of contracts for the foreign principal, an Agency PE exists regardless of the formal legal structure.

Spain's Position

Spain was an early adopter of the BEPS recommendations and signed the Multilateral Instrument (MLI) in 2017. As a result, many of Spain's existing DTAs have been modified by the MLI to incorporate the post-BEPS PE provisions. The specific impact depends on which DTA applies and whether both states have made the relevant MLI election — something we verify as part of our PE risk assessment.

• Employment vs service contract: Engaging the Spain-based person as an independent contractor (self-employed, autónomo) rather than an employee reduces (but does not eliminate) PE risk. The contractor must genuinely operate independently, serve multiple clients, and assume meaningful commercial risk — otherwise the AEAT may reclassify the arrangement.
• Limited authority clauses: Ensuring employment contracts explicitly limit the employee's authority — no authority to conclude, negotiate or approve contracts in Spain — and that this limitation is genuinely observed in practice. Paper restrictions that are not reflected in actual behaviour do not protect against Agency PE.
• Substance requirements: If the foreign company decides to establish a formal Spanish subsidiary or branch, ensuring it has genuine substance (real management, decision-making, qualified personnel) to avoid being treated as a shell and to withstand transfer pricing scrutiny.
• Activity scoping: Carefully scoping the Spain-based employee's role so that their activities genuinely fall within the preparatory/auxiliary exception — for example, purely market research, information gathering, or liaison functions — with clear documentation that core business activities remain in the home country.
• Inter-company agreement: Having a robust, arm's-length service agreement between the foreign parent and the Spanish PE (if one is intentionally established), with appropriate transfer pricing documentation meeting Spain's requirements under Article 16 LIS and Royal Decree 634/2015.
• Regular review: PE risk is not static — as the employee's role evolves and their presence in Spain becomes more permanent, the risk profile changes. Annual reviews are essential for any company with Spain-based remote workers.