Does my foreign company have to register in Spain if it only has a local sales executive?

It depends on the role of the salesperson. If they only collect market information and report to the parent, probably not. If they negotiate prices, prepare proposals and steer final customers to closure, the probability of post-BEPS dependent agent PE is very high. The analysis is functional, not contractual.

We have a "consultancy" agreement with a freelancer in Spain. Does that protect us?

Not by itself. The AEAT and the Labour Inspection apply the functional test: dependency, integration, tools, hours, exclusivity. A consultant working full time for years for a single client with fixed hours is a hidden employee. And if their activity is core, also a PE.

When is it preferable to incorporate a subsidiary rather than operate as a declared PE?

A subsidiary offers more operational cleanliness: 25% corporate income tax with all deductions, normal VAT treatment, employment contract, and elimination of the PE question. A declared PE is viable where the activity is transitory or where the group has parent-jurisdiction tax reasons to keep the operation at principal level. For permanent and material activity, a subsidiary.

How far back can the AEAT re-assess?

Four non-time-barred tax years. Ten years if simulation or wilful conduct of criminal relevance is found. In practice, hidden-PE audits typically open four full tax years from the outset.

Is there any voluntary self-assessment that reduces the penalty?

Yes. The voluntary regularisation under art. 27 LGT before notification of the opening converts the penalty into a surcharge (between 1% and 15%, depending on the delay) and eliminates wilful intent. It is the most efficient route if the group identifies the risk before the audit team does. Once the opening is notified, the surcharge is no longer available.

We have a declared PE in Spain and want to move to a subsidiary. How is that done?

Non-cash contribution of the PE to a newly incorporated Spanish company under the tax-neutral regime (Chapter VII of Title VII LIS), provided the valid economic motive conditions are met. It is a standard and well-tested transaction. It requires documentation, valuation and, in many cases, a prior binding tax ruling from the DGT.

What happens with VAT if a hidden PE is detected?

The PE is treated as a Spanish taxable person. The AEAT assesses VAT not charged, with charge-back to clients where possible and with standalone penalties. VAT assessments often have a greater financial impact than the IRNR side in B2C and mixed B2B-B2C sectors.

How is double taxation avoided when the AEAT re-assesses a PE in Spain?

Through Mutual Agreement Procedure (MAP) with the parent’s jurisdiction or unilateral correlative adjustment under the DTT. Timelines are long (5-7 years) and full recovery is not guaranteed. This is why the reputational and financial cost of an assessed hidden PE materially exceeds that of a clean ex ante structure.

Permanent establishment risk in Spain: when your activity triggers tax obligations (2026)

Most foreign companies operating in Spain do not have a subsidiary. They have a remote sales executive hired by the parent who travels to Madrid and Barcelona, an IT contractor freelancing full time for the group for years, a logistics warehouse subcontracted to serve Iberian e-commerce, a distribution partner who signs contracts in its own name but with a thin margin, or simply an EMEA regional manager who lives in Spain because of the climate. For group tax leadership, each of those configurations is a “light commercial operation, no Spanish legal presence”. For the AEAT (Spanish tax authority), each can be a hidden permanent establishment (PE) re-assessable four tax years backwards.

This guide is aimed at CFOs, tax directors and heads of international of foreign groups with real activity in Spain but no incorporated subsidiary, or with a model whose PE characterisation has not been audited in recent years. It covers the applicable post-BEPS Action 7 framework, the three types of PE under the OECD Model, the typical scenarios that generate risk in 2026, the consequences of an undeclared PE, and the reasonable mitigation routes available before the audit arrives with a thesis already formed.

TL;DR

Remote sales executive hired by the foreign entity who habitually negotiates prices and closes proposals in Spain: high risk of dependent agent PE (art. 5.5 OECD MTC post-BEPS).
Freelance IT contractor working 100% for a single foreign company for several years from a Spanish home address: risk of fixed-place PE (the contractor’s home office at the principal’s disposal) and risk of employment requalification.
Logistics warehouse owned or subcontracted, dedicated to serving sales to final customers in Spain: after BEPS Action 7 it no longer falls automatically within the art. 5.4 OECD MTC exception if the activity is not preparatory or auxiliary.
Commissionnaire / LRD distributor signing in its own name but bearing minimal risk: post-BEPS, the AEAT can attribute a PE to the foreign principal (line confirmed by Tribunal Supremo judgment 1481/2020 on Dell and subsequent case law).
Consequences of an undeclared PE: IRNR (Non-Resident Income Tax) assessment at 25% on attributable income + interest + 50%-150% penalty + VAT + possible criminal tax offence if the defrauded amount per tax year exceeds EUR 120,000 (art. 305 of the Spanish Criminal Code).
AEAT statute of limitations to assess an undeclared PE: 4 years from the end of the voluntary filing period, 10 years if the conduct is qualified as simulation or wilful evasion.
Mitigation routes: functional review, role optimisation, binding tax ruling from the DGT (Directorate-General for Taxation), or incorporation of a Spanish subsidiary to channel the activity.

Applicable legal framework

PE characterisation in Spain is decided at the intersection of domestic law and the applicable double tax treaty (DTT). Where a DTT applies with the parent’s jurisdiction, the treaty definition prevails (in practice almost always aligned with art. 5 OECD MTC). In the absence of a DTT, art. 13 LIRNR (Non-Resident Income Tax Act) applies.

Art. 13.1.a LIRNR (RDL 5/2004): lists situations in which a person or entity operates in Spain through a PE — management offices, branches, offices, factories, workshops, warehouses, shops, mines, wells, construction sites lasting more than 6 months, and agencies and representations authorised to contract in the name and on behalf of the taxpayer.
Art. 5 OECD Model Tax Convention (2017 version, post-BEPS Action 7): defines a PE as “a fixed place of business through which the business of an enterprise is wholly or partly carried on”, regulates construction PE (>12 months, some treaties 6), the reformed dependent-agent PE, and the preparatory or auxiliary activities exception (art. 5.4) with anti-fragmentation rule.
BEPS Action 7 (OECD, 2015): changed the dependent agent standard (it is now sufficient to “play the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise”), restricted the art. 5.4 exception to activities that are “of a preparatory or auxiliary character” taken as a whole, and introduced the anti-fragmentation rule to prevent the artificial splitting of activities between related entities.
OECD Multilateral Instrument (MLI): Spain deposited its instrument of ratification in September 2021; the MLI entered into force for Spain on 1 January 2022 and, subject to reservations, incorporates BEPS Action 7 provisions into the DTT network without bilateral renegotiation.
Key Tribunal Supremo case law: STS 1481/2020 of 12 November (Dell case) recognised dependent agent PE in a commissionnaire structure years before its formal entry into DTTs via the MLI. Subsequent doctrine has confirmed the line on services PE (STS 25/01/2024) and the primacy of functional over formal analysis.
Pillar 1 Amount A (OECD): pending effective implementation in 2026. It will introduce an additional digital nexus for large groups. It is not applicable law yet, but it is worth keeping on the planning horizon.

When a PE is created — the three types

Art. 5 MTC recognises three categories. The AEAT can re-assess under any of them; in recent audits the reformed dependent agent has been the most-used route.

Fixed place of business PE (art. 5.1 MTC)

Three cumulative elements are required:

Identifiable physical place (office, suite, branch, warehouse, mine, facility). Ownership is not required — effective availability is enough.
Minimum permanence. OECD doctrine refers to six months as an indicative threshold, not as an absolute rule.
Core business activity of the enterprise carried out through that place.

The art. 5.4 MTC exception carves out preparatory or auxiliary activities (storage, display, purchase of goods, collection of information, advertising activities). Post-BEPS the exception applies only if the activity considered as a whole is preparatory or auxiliary — mass storage dedicated to serving e-commerce sales hardly fits within the exception any more.

The anti-fragmentation rule prevents the artificial split of a core activity between several related entities so that each portion appears auxiliary.

Construction PE (art. 5.3 MTC)

Applies to construction, installation or assembly sites where their duration exceeds 12 months (some DTTs shorten the period: Spain-Brazil 6 months; several Latin American DTTs 6 or 9 months). The clock runs continuously and includes on-site preparatory work. Subcontractors and connected sites accumulate to the principal contractor’s clock where there is economic or geographical unity of the project.

Dependent agent PE (art. 5.5 MTC, reformed by BEPS Action 7)

This is the head of PE that has grown the most in audits since 2022. A PE exists where a person (natural or legal) habitually acts in Spain on behalf of a foreign enterprise and, in the course of that action, routinely concludes contracts, or plays the principal role leading to the conclusion of contracts that are concluded without material modification by the foreign enterprise, where those contracts are:

in the name of the enterprise; or
for the transfer of property owned by the enterprise; or
for the provision of services by the enterprise.

The BEPS reform significantly broadened the scope. Previously the agent had to conclude contracts in the principal’s name; now it is enough to play the principal role in the negotiation, even if formal signature occurs at the parent’s head office. The independent agent exception (art. 5.6 MTC) requires acting in the ordinary course of one’s own business and not almost exclusively on behalf of one enterprise or related entities.

Typical scenarios generating risk in 2026

Remote sales executive hired by the foreign entity

A sales executive resident in Spain, hired by the German or US parent, travels to Iberian clients, presents proposals, negotiates price and conditions, and closes deals. Formal signature occurs at the principal’s head office. Risk: dependent agent PE. What matters is not who signs — it is who carries the negotiation to closure. If the principal approves “routinely without material modification”, there is a PE.

Freelance IT contractor working full time

A self-employed freelance developer in Spain, invoicing 100% for several years to a single foreign company, with hours, tools and reporting akin to those of an employee. Double risk: (i) employment requalification by the Spanish Labour Inspection (hidden employment + social security contributions); (ii) fixed-place PE if the contractor’s home office is deemed “at the disposal” of the principal and core activity is conducted from it.

E-commerce logistics warehouse

Owned or subcontracted warehouse in Spain dedicated to storing product and fulfilling orders to Spanish final customers. Pre-BEPS, storage activity was expressly excluded (art. 5.4.b). Post-BEPS, the carve-out only operates if the activity considered as a whole is preparatory or auxiliary — a warehouse that closes the sales cycle to final consumer is not. The European Commission and the AEAT have incorporated this criterion into their audit playbook since 2022.

Madrid-based EMEA marketing manager

Regional director with authority over budgets, campaigns and partners for the EMEA region, resident in Spain and working from home or a co-working space. Risk of fixed-place PE (home office at the principal’s disposal) and, depending on the commercial role, dependent agent PE.

Local after-sales or customer success team

A technical support or customer success team handling Spanish final customers, managing renewals, upsells and cross-sells. If renewals are deemed “routine conclusion of contracts”, the AEAT can argue dependent agent PE.

Commissionnaire / LRD distributor

Local distributor signing contracts in its own name but with a minimal margin and limited risks, while the foreign principal retains the economic ownership of the business. Following BEPS Action 7 and STS 1481/2020 (Dell), the AEAT can attribute a PE to the principal even where, formally, there is no agency. The contractual form (French commissionnaire, Belgian LRD, low-risk distributor) does not by itself provide shelter.

Server / data centre located in Spain

Owned server or significant colocation with substantive economic activity. OECD doctrine accepts server PE where staff or value-adding automation are present. The Pillar 1 Amount A digital nexus is pending implementation, but the AEAT is already focusing on this category in SaaS and marketplace sectors.

Consequences of an undeclared PE

When the audit concludes that a hidden PE exists, it assesses all the result attributable to the PE during the non-time-barred tax years. The standard package includes:

IRNR on activity attributable to the PE at the 25% rate (art. 19 LIRNR), applied to the taxable base determined under corporate income tax rules (attributable income, deduction of direct expenses and a reasonable share of general expenses).
Default interest from the accrual of each tax year through to the assessment.
Tax penalty of 50%-150% on the unpaid tax (arts. 191 et seq. LGT — General Tax Act), graduated according to degree of fault and concealment.
Spanish social security contributions for personnel located in Spain if the assessment entails employment requalification, with 20% surcharges and possible standalone penalties from the Labour Inspection.
VAT: the PE is treated as a Spanish taxable person, with obligation to register, charge and file periodic returns. The VAT assessment can be quantitatively more material than the IRNR side.
Formal penalty for non-filing of IRNR returns: EUR 200 per return not filed, in addition to the proportional penalty on the tax due.
Possible referral to the criminal courts (art. 305 Spanish Criminal Code) where the defrauded amount per tax concept and tax year exceeds EUR 120,000 and wilful intent is present. For international groups, the threshold is easily reached on full tax years.
Double taxation that the group must recover in the parent’s residence jurisdiction via MAP (Mutual Agreement Procedure) or correlative adjustment. Typical timelines are 5 to 7 years and the financial result does not offset the reputational cost nor the cash immobilisation.

The statute of limitations is 4 years from the end of the voluntary filing period (art. 66 LGT). Where the AEAT qualifies the conduct as simulation (art. 16 LGT) or finds wilful evasion of criminal relevance, the period extends to 10 years from the end of the period for filing the tax return.

How to mitigate risk before the audit arrives

Effective defence is built before, not after. Four reasonable lines:

1. Audit the current configuration

Map the functions actually performed in Spain by each person, contractor, partner or facility, and cross-check them against the art. 5 MTC definition of the applicable DTT. The analysis is documented and retained: holding coherent documentation predating any audit file is worth more than any submission filed afterwards.

2. Optimise functions where possible

If the local salesperson closes contracts, the decision is structural: either contract conclusion is centralised outside Spain with real evidence that the parent approves on substantive criteria, or the PE is accepted and channelled via a subsidiary. Formal-only fixes without substance (e-signature from the parent, generic “advisory” agreements, no-authority clauses) do not withstand the AEAT’s functional thesis.

Where activity falls into a grey zone (preparatory or auxiliary), revisit the anti-fragmentation rule to make sure no other activities of the same group in Spain combine to create a PE.

3. Incorporate a Spanish subsidiary

Where the activity in Spain is real and recurring, a subsidiary is the clean exit. A Spanish company as the local operating entity, intra-group services and/or distribution with documented transfer pricing, up-to-date master file and local file, and elimination of the PE risk from the moment the subsidiary absorbs the functions. The annual cost of a well-structured subsidiary is significantly lower than the assessment of a hidden PE over four tax years.

4. Binding tax ruling from the DGT

For grey-zone cases with material economic substance, the binding tax ruling (arts. 88 and 89 LGT) is an under-used route to legal certainty. The DGT replies in 6-12 months and its criterion binds the AEAT in identical scenarios. It is appropriate when there is an identifiable project, concrete facts and a defensible legal argument. It is not appropriate where the current model is already vulnerable — in that case the ruling can accelerate the assessment.

Common mistakes

Thinking that “there is no PE because there is no branch”. The definition is functional, not formal. A home office can be a PE; an office leased by a partner can be a PE; a subcontracted warehouse can be a PE.
Signing contracts “by bot” digitally from the parent while all substantive negotiation is conducted by a person in Spain. The AEAT looks at who decides, not who signs.
Re-writing employment contracts as “consultancy” without changing the functional reality. Requalification is mechanical and drags PE + social security + Labour Inspection penalties.
Assuming that the DTT prevents PE in commissionnaire structures post-BEPS. After the Dell judgment and the entry into force of the MLI, the case-law line is the opposite.
Treating e-commerce storage as auxiliary activity without analysing whether the operation as a whole falls outside the reformed art. 5.4 exception.
Failing to document functions when the model was designed 5-7 years ago. Without master file, intra-group contracts, role descriptions and decision evidence, the burden of proof (which lies with the taxpayer, art. 105 LGT) becomes unmanageable.
Arriving late. By the time the first information request lands, the AEAT file has been months in preparation. Preventive audit with contained cost is always more cost-effective than reactive defence.