Subsidiary vs Branch in Spain: Comparison for Business Incorporation

Embarking on the journey of expanding your business to Spain, one of the vibrant economies of Europe, marks a significant milestone in your entrepreneurial endeavour. Due to its advantageous position, vibrant economy, and welcoming business environment, Spain has numerous prospects for international investors. However, before registering a business in Spain, it’s crucial to understand the two primary options for business expansion: establishing a subsidiary or a branch. 

This article aims to provide a comprehensive guide for foreign entrepreneurs on the differences between a subsidiary and a branch in Spain, helping you make an informed decision tailored to your business needs.

Subsidiary vs Branch: Which is Right for Your Business in Spain?

When considering expansion into Spain, foreign entrepreneurs often face the dilemma of choosing between establishing a subsidiary or a branch. It is crucial to assess your business objectives, operational needs, and legal issues because every choice has pros and downsides of its own.

A subsidiary company in Spain is a separate legal entity from its parent company, offering limited liability protection and autonomy in decision-making. It operates as a distinct entity, subject to Spanish corporate laws and regulations. A branch office in Spain, on the other hand, has no own legal existence and acts as an extension of the parent business. It represents the parent company in Spain and operates under its umbrella, sharing both assets and liabilities.

How to Choose Between a Subsidiary and a Branch When Expanding to Spain?

Making the right choice between a subsidiary and a branch depends on various factors, including:

• Legal Structure: Consider whether you prefer a separate legal entity (subsidiary) or an extension of the parent company (branch).
• Liability Protection: Determine the extent of liability protection you need for your Spanish business operations. 
• Tax Implications: Recognize the tax ramifications of each choice and how they relate to your financial goals.
• Operational Autonomy: Choose how much authority and control you want for your activities in Spain.
• Market Presence: Assess how opening a branch or subsidiary would affect your brand’s perception and image in Spain.

Pros and Cons of Establishing a Subsidiary vs a Branch in Spain

Subsidiary:

Pros:

• Limited liability protection protects the parent firm from possible risks and liabilities.
• Greater operational autonomy allows for tailored decision-making and management control.
• Customer trust and business growth are facilitated by increased reputation and local market presence.
• Subject to Spanish corporate tax rates on profits generated within Spain, currently ranging from 25% to 30%.
• Eligible for tax deductions and incentives available to domestic Spanish companies.
• Required to comply with transfer pricing regulations for transactions with related entities.
• Mandatory to appoint local directors and establish a physical office address in Spain.

Cons:

• Financial and bureaucratic obstacles may arise from higher setup and administration costs.
• To maintain separate legal entity status, one must adhere to Spanish reporting requirements and corporate governance laws.

Branch:

Pros:

• Simplified setup process with fewer regulatory hurdles and lower initial costs compared to a subsidiary.
• Direct extension of the parent company enables seamless integration of operations and centralized management.
• Flexibility in repatriating profits and funds to the parent company without additional tax implications.
• Taxed on its Spanish-source income at the same corporate tax rates applicable to subsidiaries.
• May face additional withholding taxes on remittances of profits to the parent company, subject to double tax treaty provisions.
• Exempt from certain Spanish tax reporting obligations applicable to subsidiaries, such as transfer pricing documentation requirements.
• Not required to appoint local directors but must designate a legal representative for official communications with Spanish authorities.

Cons:

• Lack of limited liability protection exposes the parent company to potential legal and financial risks.
• A lack of autonomy and decision-making power may make it more difficult to be flexible and adapt to the specifics of the local market.

Step-by-Step Guide to Setting Up a Subsidiary or Branch in Spain

Setting Up a Subsidiary Company in Spain

1. Select a distinctive name for your subsidiary and check the Spanish Commercial Registry to see if it is available.
2. The articles of incorporation, which describe the goals, composition, and information about the shareholders, should be drafted and notarized.
3. Acquire a tax identification number (NIF) and enroll with the subsidiary with the Spanish Tax Agency (AEAT).
4. Open a corporate bank account in Spain and deposit the minimum share capital required by law.
5. Register the subsidiary with the Social Security system and fulfill any additional regulatory requirements specific to your industry.
6. Comply with ongoing corporate governance obligations, including annual financial reporting and tax filings.

Setting Up a Branch Office in Spain

1. Register the parent company with the Spanish Commercial Registry as a foreign entity intending to establish a branch.
2. Prepare and submit the required documentation, including the parent firm’s articles of association and a resolution authorizing branch establishment.
3. Acquire a tax identification number (NIF) for the branch from the Spanish Tax Agency (AEAT).
4. Create a branch bank account in Spain to make operations and transactions involving money easier.
5. Comply with any industry-specific regulations and obtain the licenses or permits required for your branch’s operations.
6. Maintain regular communication and coordination between the branch and the parent company to ensure seamless operations and compliance.

Legal and Tax Considerations for Subsidiaries and Branches in Spain:

Subsidiary:

• Subject to Spanish corporate tax rates on profits generated within Spain, currently ranging from 25% to 30%.
• Eligible for tax deductions and incentives available to domestic Spanish companies.
• Required to comply with transfer pricing regulations for transactions with related entities.
• Mandatory to appoint local directors and establish a physical office address in Spain.

Branch:

• Taxed on its Spanish-source income at the same corporate tax rates applicable to subsidiaries.
• May face additional withholding taxes on remittances of profits to the parent company, subject to double tax treaty provisions.
• Exempt from certain Spanish tax reporting obligations applicable to subsidiaries, such as transfer pricing documentation requirements.
• Not required to appoint local directors but must designate a legal representative for official communications with Spanish authorities.

Subsidiary vs Branch in Spain: A Comprehensive Comparison for Entrepreneurs

In summary, choosing between a subsidiary and a branch for expanding your business to Spain requires careful consideration of various factors, including legal structure, liability protection, tax implications, and operational autonomy. While subsidiaries offer greater protection and autonomy, branches provide simplicity and integration with the parent company’s operations. By assessing your business needs and objectives, you are able to make a well-informed choice in the Spanish market that is consistent with your long-term growth plan.

Conclusion

Expanding your business to Spain holds immense potential for growth and success, provided you navigate the complexities of establishing a subsidiary or a branch effectively. By understanding the nuances of each option and evaluating their respective pros and cons, you can embark on this exciting journey with confidence and clarity. The dynamic market environment and strategic advantages of Spain are waiting for your entrepreneurial vision, whether you choose to establish a branch or a subsidiary.

If you’re ready to take the next step and set up your business in Spain, OnDemand International stands ready to assist you. Our proficiency in incorporating companies throughout Europe, encompassing Spain, Poland, the Netherlands, and Germany, allows us to provide all-encompassing assistance customized to meet your unique requirements. Contact us right now to discover the full possibilities of your business’s European expansion.