Difference Between Branch vs. Subsidiary vs. Representative Office in Spain – 2024 Guide

Spain, as one of Europe’s most vibrant economies, is an attractive destination for foreign investors looking to expand their businesses. With its strategic location, favorable business climate, and access to the European market, Spain offers various options for companies looking to establish a presence in the country. Depending on the nature and scale of the business, foreign companies can choose between three main options: branch, subsidiary, and representative office. Each of these legal structures has its own unique features, benefits, taxation models, and procedural requirements. This article will provide an in-depth comparison of the three structures to help businesses make informed decisions about their expansion plans.

Overview of Branch, Subsidiary, and Representative Office

Before diving into the technical details, it’s essential to understand the fundamental definitions of these three structures:

• Branch Office: A branch office is an extension of the parent company. It operates under the same legal entity as the parent company and performs the same business activities. A branch in Spain does not have independent legal status, meaning that the parent company is directly liable for its operations and obligations.
• Subsidiary: A subsidiary is an independent legal entity established by the parent company in Spain. Unlike a branch, a subsidiary operates as a separate entity, often under the form of a limited liability company (Sociedad de Responsabilidad Limitada, or SL) or public limited company (Sociedad Anónima, or SA). The parent company is not directly liable for the subsidiary’s obligations.
• Representative Office: A representative office is a small entity that is primarily used for market research, liaison, or promotional activities. It is not permitted to engage in commercial activities that generate revenue and is used to explore business opportunities in Spain without engaging in full-scale operations.

Key Differences Between Branch, Subsidiary, and Representative Office in Spain

Taxation in Spain for Branch, Subsidiary, and Representative Office

Spain’s tax system is transparent and closely aligned with the European Union’s standards. However, the taxation of a branch, subsidiary, and representative office differs significantly based on their legal structure and the nature of their activities.

Taxation of a Branch

A branch in Spain is considered an extension of the parent company and is therefore subject to the following tax rules:

• Corporate Income Tax: Branches are taxed in Spain on the income generated from Spanish operations. The standard corporate tax rate is 25%, which applies to both branches and resident companies. If the branch qualifies as a small enterprise, it may benefit from a reduced tax rate.
• Non-Resident Income Tax: Since the branch is technically part of a foreign entity, it may be subject to Spain’s non-resident income tax regime. Non-resident entities are typically taxed only on income earned within Spain.
• Withholding Taxes: Branches are also subject to withholding taxes on dividends, interest, and royalties paid to the parent company. Spain has tax treaties with many countries to avoid double taxation.
• Value Added Tax (VAT): Branches engaged in commercial activities are subject to VAT in Spain, with the standard VAT rate being 21%.

Taxation of a Subsidiary

A subsidiary, as a separate legal entity, is treated as a resident company in Spain and is subject to domestic taxation:

• Corporate Income Tax: The standard corporate tax rate of 25% applies to subsidiaries, but small and medium-sized enterprises (SMEs) may qualify for a reduced rate.
• Dividend Withholding Tax: When a subsidiary distributes dividends to the foreign parent company, it is subject to withholding tax. Spain has a wide network of double taxation treaties, which can reduce or eliminate withholding taxes on dividends, depending on the treaty terms.
• VAT: A subsidiary must also register for VAT if it engages in taxable transactions in Spain. As with a branch, the standard VAT rate is 21%.

Taxation of a Representative Office

A representative office does not engage in commercial transactions, which means it does not generate taxable income. Therefore, it is not subject to corporate income tax or VAT. However, the parent company remains liable for any activities conducted by the representative office.

• No Taxable Income: Since a representative office does not generate revenue, it is not subject to corporate taxation.
• Limited Tax Obligations: The representative office may still need to register with local tax authorities for other obligations, such as employment taxes if it hires staff for administrative purposes.

Requirements for Setting Up a Branch, Subsidiary, or Representative Office in Spain

Each type of business structure has its own set of legal and procedural requirements for setup.

Requirements for Setting Up a Branch

1. Registration with the Spanish Commercial Registry: A branch must be registered with the Mercantile Registry (Registro Mercantil) in Spain.
2. Appointment of a Legal Representative: A branch must appoint a legal representative who will be responsible for overseeing its operations in Spain.
3. Obtaining a Tax Identification Number (NIF): The branch will need to obtain a Spanish tax identification number.
4. Parent Company Documents: The branch must submit the parent company’s legal documents, including a certificate of incorporation, memorandum of association, and articles of association, all of which must be translated into Spanish.
5. Financial Reporting: A branch is required to keep separate financial records for its operations in Spain and submit them annually.

Requirements for Setting Up a Subsidiary

1. Incorporation as a Legal Entity: The most common forms of a subsidiary are the SL (limited liability company) or SA (public limited company). Both require formal registration.
2. Minimum Share Capital: For an SL, the minimum share capital is €3,000, while an SA requires a minimum capital of €60,000.
3. Articles of Association: The subsidiary must have its own articles of association, which govern its operations.
4. Legal Representative: The subsidiary must appoint a legal representative or a board of directors to manage its operations.
5. Tax Identification Number (NIF): The subsidiary must obtain a tax identification number.
6. Accounting and Auditing: Subsidiaries are required to keep detailed accounting records and may be subject to annual audits depending on their size.

Requirements for Setting Up a Representative Office

1. Registration: A representative office must be registered with the local authorities but does not need to be listed in the Mercantile Registry.
2. Appointment of a Representative: A representative office must appoint a local representative who is responsible for overseeing its activities.
3. Tax Identification Number (NIF): Even though the representative office does not generate taxable income, it must still obtain a tax identification number for administrative purposes.

Procedure for Establishing a Branch, Subsidiary, or Representative Office in Spain

The process of establishing a presence in Spain can vary depending on the structure chosen, but generally involves the following steps:

Procedure for a Branch

1. Obtain Legal Documents: Gather all the necessary documents from the parent company, including the certificate of incorporation, board resolutions, and financial statements.
2. Appointment of a Legal Representative: Appoint a legal representative for the branch in Spain.
3. Notarization and Legalization of Documents: The parent company’s documents must be notarized and translated into Spanish. They may also need to be legalized with an apostille.
4. Register with the Commercial Registry: Submit the notarized documents and register the branch with the Mercantile Registry.
5. Obtain Tax Identification Number (NIF): Apply for a tax identification number for the branch.
6. Start Operations: Once registered and the NIF is obtained, the branch can start operations.

Procedure for a Subsidiary

1. Choose the Company Form: Decide whether to establish an SL or SA based on the business’s needs.
2. Draft Articles of Association: Create the subsidiary’s articles of association, which outline its governance and operations.
3. Deposit Share Capital: Deposit the required minimum share capital in a Spanish bank account.
4. Notarization and Incorporation: Sign the articles of association before a notary public in Spain and file them with the Commercial Registry.
5. Obtain Tax Identification Number (NIF): Apply for a tax identification number.
6. Start Operations: Once the subsidiary is registered and the NIF is obtained, it can begin operating independently.

Procedure for a Representative Office

1. Obtain Parent Company Documents: Gather the parent company’s legal documents and resolutions for establishing the representative office.
2. Appoint a Local Representative: Appoint a local representative responsible for the office.
3. Register with Authorities: Register the representative office with local authorities.
4. Obtain Tax Identification Number (NIF): Apply for a tax identification number for administrative purposes.
5. Begin Activities: Once registration is complete, the office can begin its exploratory and non-commercial activities.

Benefits of Branch vs. Subsidiary vs. Representative Office in Spain

Each structure offers distinct advantages, depending on the business’s objectives and operational needs:

Benefits of a Branch

• Simplicity: Setting up a branch is often simpler and faster than establishing a subsidiary, as it does not require creating a new legal entity.
• Direct Control: The parent company retains direct control over the branch’s operations, ensuring consistency in business practices.
• Cost-Effective: A branch typically involves lower setup costs than a subsidiary since it doesn’t require a minimum share capital.

Benefits of a Subsidiary

• Limited Liability: The parent company enjoys limited liability, as the subsidiary operates as a separate legal entity. This shields the parent company from potential risks associated with the subsidiary’s operations.
• Independence: A subsidiary operates independently, which can be advantageous for tax planning and local management.
• Reputation: Operating as a Spanish company can enhance the business’s credibility in the local market.

Benefits of a Representative Office

• Low-Cost Entry: A representative office is the most cost-effective way to establish a presence in Spain without engaging in full-scale operations.
• Exploratory Advantage: It allows businesses to assess the Spanish market and gather information before making more substantial investments.
• Simplified Administration: With minimal legal and accounting obligations, a representative office is easy to manage.

Key Aspects to Consider When Choosing Between Branch, Subsidiary, and Representative Office

When deciding which structure to choose, businesses should consider the following factors:

• Business Objectives: A branch is suitable for companies looking for direct control and minimal administrative burdens, while a subsidiary offers more independence and limited liability. A representative office is ideal for exploratory purposes.
• Liability: A subsidiary offers limited liability, protecting the parent company from debts and obligations. A branch does not provide this protection.
• Taxation: Subsidiaries are taxed as resident companies in Spain, whereas branches are subject to non-resident tax rules. A representative office does not engage in taxable activities.
• Administrative Burden: Subsidiaries have higher administrative and accounting requirements than branches or representative offices.
• Flexibility: A branch allows for easier expansion of existing operations, while a subsidiary can be better for long-term growth and local reputation-building.

Which is better “Subsidiary or a Branch” in Spain?

Deciding between opening a subsidiary or a branch in Spain depends on your business goals, liability preferences, and operational needs.

A subsidiary is a separate legal entity, offering limited liability to the parent company. This means the parent is not directly responsible for the subsidiary’s debts or obligations, making it ideal for businesses looking to minimize risk. Subsidiaries also benefit from being taxed as resident entities, potentially enjoying Spain’s corporate tax benefits, and can independently manage local operations. However, setting up a subsidiary involves more complex administrative processes and higher initial costs, like meeting capital requirements.

A branch, on the other hand, is not a separate entity, meaning the parent company is fully liable for any debts or obligations. Branches are simpler and quicker to establish, with fewer administrative hurdles and lower costs, making them suitable for businesses seeking a cost-efficient entry into Spain. However, they are taxed as non-resident entities and offer less operational independence.

In summary, if you aim for long-term presence with limited liability and local autonomy, a subsidiary is the better option. For a simpler, lower-cost solution with direct control from the parent company, a branch may be more appropriate.

Conclusion

Establishing a presence in Spain is a strategic move for many international businesses, and choosing the right legal structure is crucial for long-term success. A branch offers simplicity and direct control, while a subsidiary provides independence and limited liability. A representative office serves as a cost-effective entry point for businesses exploring the Spanish market. Each structure has distinct taxation, regulatory, and administrative implications, and the choice depends largely on the business’s goals, risk tolerance, and the level of commitment to the Spanish market.Understanding the nuances of each structure and adhering to the legal requirements is essential for a smooth and successful expansion into Spain. Consulting with On Demand International’s Spanish Incorporation Desk can further streamline the process and ensure compliance with Spain’s regulatory environment.