If the Spanish operation will sign contracts, hire staff or take on liability towards third parties, the answer is a subsidiary: it ring-fences the group’s assets and is the only one of the three structures that transfers through a share sale. A branch wins when initial losses are expected and the parent can use them in its own jurisdiction. A non-resident entity works only for as long as no permanent establishment exists.
That is the short answer. The long one requires numbers, because the most widespread belief among groups arriving in Spain is simply wrong: in 2026 a subsidiary and a branch are taxed at the same rate on the profits of the Spanish activity. Article 19.1 of Royal Legislative Decree 5/2004 refers expressly to the Corporate Income Tax rates. A decision taken in search of the lower rate is a decision taken on a difference that does not exist.
What does change, considerably, is liability, running costs, what can be deducted from the parent, what it costs to get money out and, above all, what it costs to leave. This article puts figures against those seven axes and closes with a six-question decision tree. For the traditional two-way contrast, with the corporate law reasoning set out in detail, see the classic subsidiary versus branch comparison; what follows adds the third route and quantifies the choice.
What exactly are the three structures and how do they differ in law?
They represent three different degrees of presence: a new Spanish company, an extension of the foreign company, or no corporate presence at all. The underlying legal difference is a single one, legal personality: only the first creates a new legal person.
The subsidiary: a Spanish company with its own legal personality
A subsidiary is a Spanish company, usually a sociedad limitada, whose shareholder is the foreign parent. It has its own legal personality, separate assets, its own governing body, and answers for its debts with its own assets. The parent, as shareholder, is not personally liable for the company’s debts.
That protection is not absolute. Directors answer for their own acts and omissions, and Spanish law provides for derivative tax liability and for piercing the corporate veil. It is worth understanding directors’ liability properly before appointing a parent-company executive as director of the Spanish subsidiary.
The branch: the same legal person operating in Spain
A branch is not a company. It is a secondary establishment with permanent representation and a degree of management autonomy, through which the foreign company operates in Spain. It has no legal personality and no capital of its own: the party contracting, owing and answering is the parent, with its worldwide assets.
For tax purposes it constitutes a permanent establishment and is taxed under Non-Resident Income Tax with a permanent establishment. There is a little-known consequence for groups outside the European Union: article 10 of Royal Legislative Decree 5/2004 requires non-resident taxpayers that are not resident in another Member State and that operate through a permanent establishment to appoint a representative resident in Spain before the tax authority. A parent in Qatar or the UAE opening a branch must appoint a tax representative in Spain; if it incorporates a subsidiary, it does not, because the subsidiary is already resident.
The non-resident entity with a Spanish tax number: fiscal presence without corporate presence
This is the option almost nobody raises, and it resolves more cases than expected. The foreign company applies for a Spanish tax identification number, registers for VAT if required, and invoices from abroad, taxed in Spain only on Spanish-source income and without a permanent establishment. There is no deed, no Commercial Registry, no accounts to file and no Spanish director. The process for obtaining a Spanish tax identification number is administrative rather than notarial.
Its limit is factual, not formal. As soon as there is a fixed place of business or an agent habitually concluding contracts in the entity’s name, a permanent establishment exists even though nothing has been registered, and any reassessment arrives with interest and penalties. That is why the permanent establishment risk should be measured before choosing this route rather than after.
How do the three options compare point by point?
The table below is the centrepiece of this article. It sets out the eight criteria that genuinely drive the decision, with the applicable provision in each cell.
| Criterion | Subsidiary (SL or SA) | Branch (permanent establishment) | Non-resident entity with Spanish tax number |
|---|---|---|---|
| Parent’s liability | Limited to its contribution. Shareholders do not answer for company debts | Unlimited. The parent answers with all of its assets | Unlimited, but confined to contracts signed from abroad |
| Legal personality | Yes, an independent Spanish legal person | No. It is the same foreign legal person | No Spanish entity exists |
| Minimum capital | SL: one euro (art. 4.1 LSC, as amended by Law 18/2022). SA: 60,000 euros | No capital. An operating fund is allocated with no statutory minimum | Not applicable |
| Taxation of profits | Corporate Income Tax, rates in art. 29 Law 27/2014 | Non-Resident Income Tax with permanent establishment, same rates by reference in art. 19.1 RLD 5/2004 | Non-Resident Income Tax without permanent establishment: 24 % in general, 19 % for residents of the EU or EEA with effective exchange of information (art. 25.1.a) |
| Deduction of parent costs | Yes, if priced at arm’s length and documented as a related-party transaction (art. 18 Law 27/2014) | Partial. A reasonable share of management and general administration expenses is deductible (art. 18.1.b). Royalties, interest and commissions paid to head office are not deductible (art. 18.1.a) | Only EU-resident entities, and only expenses with a direct and inseparable economic link to the Spanish activity (art. 24.6) |
| Accounting and filing of accounts | Spanish accounting records, its own annual accounts, filed at the Commercial Registry | Accounting for the Spanish activity, plus filing of the foreign parent’s accounts (art. 375 RRM), or specific accounts where there is no equivalence (art. 376 RRM) | No Spanish accounting obligations |
| Audit | Mandatory if two of the three thresholds in art. 263.2 LSC are exceeded in two consecutive years: 2,850,000 euros of assets, 5,700,000 euros of turnover, 50 employees | No audit of the branch as an entity; the parent’s home-country regime applies | Not applicable |
| Transfer pricing | Full related-party regime. Simplified documentation where group turnover is below 45 million euros (art. 18.3 Law 27/2014) | Not related-party transactions in the strict sense, but internal dealings are valued at market and cost allocation requires a supporting note | Only where transactions are agreed with Spanish related parties |
| Repatriation | Dividend subject to 19 % non-resident withholding, or 0 % where the EU parent-subsidiary exemption applies (art. 14.1.h) or under the treaty rate | Remittance of profits subject to a 19 % supplementary charge (art. 19.2), not applicable to EU parents or to States with a treaty and reciprocity (art. 19.3) | No repatriation: payment is received directly, subject to any withholding at source |
| Spanish tax representative | Not required, the subsidiary is resident | Mandatory where the parent is not EU-resident (art. 10 RLD 5/2004) | Required depending on the type of income and the activity |
| Exit | Share sale. A single transaction and, under most treaties, no Spanish tax for the seller | Cannot be sold: assets or a business line must be transferred, with the gain taxable in Spain | Simply stop invoicing. Deregistration |
What does each one cost to set up and to close, and how long does it take?
Setting up a subsidiary is cheaper and faster than most groups assume; closing it is the expensive part. The asymmetry between the two tables below is the figure that most often changes a decision already taken.
Incorporation: timing and cost
The fees for incorporating a Spanish limited company electronically are set by statute, not by the market. Article 5.Uno.g) of Royal Decree-Law 13/2010 sets 150 euros for the notary and 100 euros for the registrar; where capital does not exceed 3,100 euros and the articles follow one of the models approved by the Ministry of Justice, article 5.Dos.c) reduces those to 60 and 40 euros. Publication in the Official Commercial Registry Gazette is exempt from fees.
Setting up a branch has no equivalent reduced tariff and carries a cost the subsidiary does not: legalisation or apostille of the parent’s resolutions and articles, sworn translation of all that documentation and, depending on the country, certificates of good standing. Counter-intuitively, therefore, opening a branch usually costs more than incorporating a subsidiary.
| Item | Subsidiary (electronic SL) | Branch | Non-resident entity |
|---|---|---|---|
| Notary and registrar fees | 150 € + 100 € (60 € + 40 € in the reduced case) | No fixed reduced tariff | 0 € |
| Company name clearance certificate | Required | Not applicable | Not applicable |
| Apostilles and sworn translation of parent documentation | Shareholder only | Mandatory and extensive | Minimal |
| Capital duty on incorporation | Exempt | Exempt | Not applicable |
| Professional fees for set-up | Market range | Market range, higher | Market range, much lower |
| Estimated time to trading | Weeks | Weeks, plus apostille turnaround | Days or a few weeks |
| Prior Spanish tax numbers for shareholders and directors | Blocking requirement | Required for the representative | Required for the entity’s own number |
Closure: the cost almost nobody budgets for
Dissolving and liquidating a Spanish company is a full corporate procedure: dissolution resolution, opening of the liquidation, final balance sheet, payment of creditors, distribution of the surplus, public deed of extinction and registration with cancellation of entries. Throughout, the company continues to file returns and deposit accounts. Closing a branch is appreciably simpler: parent resolution, closure deed, cancellation at the Registry and tax deregistration. Closing a non-resident entity is a deregistration.
| Item | Subsidiary | Branch | Non-resident entity |
|---|---|---|---|
| Procedure | Dissolution, liquidation and extinction | Closure and cancellation at the Registry | Tax deregistration |
| Tax obligations during the process | Continue until extinction | Continue until deregistration | Cease on deregistration |
| Filing of accounts for the closing year | Yes | Yes, the parent’s | No |
| Estimated time | Months | Shorter | Immediate |
| Relative cost | The highest of the three | Intermediate | Marginal |
How is each structure taxed in 2026, and which parent costs are deductible?
In 2026 a subsidiary and a branch apply the same rates to profits, because article 19.1 of Royal Legislative Decree 5/2004 refers to the Corporate Income Tax legislation. A non-resident entity without a permanent establishment operates on a different basis altogether: it is taxed on gross income, not on profit.
Tax rates applicable in 2026
Law 7/2024 of 20 December added a forty-fourth transitional provision to Law 27/2014, phasing the reduced rates in year by year. For tax periods beginning during 2026 the following apply:
| Position of the entity | Rate in 2026 | Provision |
|---|---|---|
| General regime | 25 % | Art. 29.1 Law 27/2014 |
| Prior-year turnover below 1 million euros | 19 % on the first 50,000 euros of taxable base and 21 % on the remainder | TP 44.2.a) Law 27/2014 |
| Small entity, turnover below 10 million euros | 23 % | TP 44.2.b) Law 27/2014 |
| Newly created entity, first year with a positive base and the following one | 15 % | Art. 29.1 Law 27/2014 |
| Non-resident without permanent establishment, general | 24 % on gross income | Art. 25.1.a) RLD 5/2004 |
| Non-resident without permanent establishment, resident in the EU or EEA with effective exchange of information | 19 % on gross income | Art. 25.1.a) RLD 5/2004 |
The phasing continues: the small-entity rate falls to 22 % in 2027 and 21 % in 2028, converging on the 20 % of the definitive regime in article 29.1. A group modelling five years ahead should build that curve into the forecast rather than applying a flat 25 %.
The final rows deserve emphasis. A non-resident without a permanent establishment is taxed on gross income, not on profit. Twenty-four per cent of revenue can be considerably heavier than 25 per cent of profit as soon as the activity carries meaningful costs. This is the most frequent calculation error when the third route is compared with the other two.
Which parent costs each structure can deduct
Here the branch faces a structural limitation that cannot be negotiated away. Article 18.1.a) of Royal Legislative Decree 5/2004 treats as non-deductible any payments the permanent establishment makes to its head office by way of royalties, interest, commissions, technical assistance or the use or transfer of assets or rights. The sole exception is interest paid by branches of foreign banks to their head office.
What article 18.1.b) does allow is a reasonable share of management and general administration expenses allocated by the parent, subject to three cumulative conditions: the amounts must be reflected in the establishment’s accounting records, an explanatory note filed with the return must set out amounts, criteria and allocation keys, and those criteria must be rational and applied consistently.
The subsidiary faces no such restriction. It can pay the parent royalties, intra-group financing interest and management fees, and deduct them, provided they are priced at arm’s length and documented as related-party transactions under article 18 of Law 27/2014, subject to the general limits on interest deductibility and hybrid mismatches. Where the parent licenses brand or technology, that difference alone tips the decision towards a subsidiary.
What happens when profits are repatriated?
That depends less on the structure chosen than on where the parent is resident. It is the point that most often corrects a business case already drafted.
Dividends from a subsidiary
A subsidiary distributes dividends subject to 19 % non-resident withholding tax (article 25.1.f). That 19 per cent is reduced or eliminated in two ways. The first is the parent-subsidiary exemption in article 14.1.h, which implements Directive 2011/96/EU: profits distributed to a parent resident in another Member State are exempt where the direct or indirect holding is at least 5 per cent and has been held without interruption for the year preceding the date the distributed profit becomes payable, or is completed subsequently, in which case the tax paid is refunded. The second route is the reduced rate under the applicable double tax treaty, where the parent sits outside the European Union.
Both routes require a tax residence certificate for the parent, issued by its own tax authority. Without it, tax is withheld at the domestic rate and reclaimed afterwards, with the cash cost that implies. The full mechanism is set out in the article on avoiding double taxation between parent and subsidiary.
Remittance of branch profits: the 19 % supplementary charge
Article 19.2 of Royal Legislative Decree 5/2004 provides that, where income obtained by a permanent establishment is transferred abroad, a supplementary charge of 19 per cent is payable on the amounts transferred. It is the Spanish equivalent of a branch profits tax.
Paragraph 3 of the same article switches it off in two cases, and those are what make the branch viable for most European groups: it does not apply to permanent establishments of entities with tax residence in another EU Member State, save for tax havens, nor to entities resident in a State with a double tax treaty with Spain that does not expressly provide otherwise, provided reciprocal treatment exists.
The practical reading is straightforward. For an EU parent, a branch repatriates without a second layer of tax. For a parent in a country with no treaty with Spain, the branch bears an additional 19 per cent that puts it on the same footing as a subsidiary dividend, at which point the branch’s fiscal advantages disappear entirely.
Drawings from a non-resident entity
There is no repatriation, because there are no Spanish profits to repatriate: the client pays the foreign entity directly, subject to whatever Spanish withholding applies to that particular income. It is the simplest model for as long as there is no permanent establishment and for as long as the Spanish client is willing to contract with a supplier that has no local presence, two conditions that often fail at the same time.
What accounting, filing and transfer pricing obligations does each structure carry?
The subsidiary takes on the full Spanish package; the branch takes on a different and less well understood one; the non-resident entity takes on none. The point that surprises most sits with the branch.
Filing of accounts: the article 375 trap
Article 375 of the Commercial Registry Regulation requires foreign companies with a branch open in Spain to file at the Registry where the branch is recorded the annual accounts of the foreign company, and where applicable its consolidated accounts, drawn up in accordance with its own legislation. Not the branch’s accounts: the parent’s.
Article 376 adds an equivalence test. If the parent’s legislation does not require such accounts to be prepared, or requires them in a form not equivalent to Spanish rules, the company must prepare accounts covering the branch’s activity and file those instead. For a group whose parent sits in a jurisdiction with no audited-accounts requirement, or with different standards, the consequence is twofold: accounts that did not previously exist must be produced, and the group’s accounts become public and searchable in Spain. Many boards discover this after the branch has been registered.
Audit
A subsidiary is audited once it exceeds two of the three thresholds in article 263.2 of Royal Legislative Decree 1/2010 in two consecutive years: assets above 2,850,000 euros, annual turnover above 5,700,000 euros, or an average of more than 50 employees. In the first financial year following incorporation it is enough to meet two of the three at the year end to be exempt.
A branch is not audited as a separate Spanish entity, which is usually presented as a saving. It is only partly so, because the accounting work for the Spanish activity still has to be done and the article 375 filing may force an audit in the home country. The operational detail of this area is covered by the accounting for foreign subsidiaries service.
Transfer pricing
A subsidiary has full related-party dealings with its parent, priced at arm’s length and documented under article 18 of Law 27/2014. Documentation takes a simplified form where group turnover is below 45 million euros (article 18.3), which keeps most Spanish market entries outside the full documentation burden.
A branch has no related-party transactions with its head office in the strict sense, because it is the same legal person, but that is no relief: internal dealings are valued at market to attribute profit to the establishment, and the allocation of general costs requires the note under article 18.1.b). In practice the documentary effort is comparable, with the difference that branches attract less established doctrine and more inspector discretion. Under either structure, the genuine economic substance of the Spanish operation is what sustains the position under review.
Which structure should you choose? A six-question decision tree
Work through the questions in order and stop at the first one that produces an answer settling the decision.
| # | Question | Answer | Consequence |
|---|---|---|---|
| 1 | Will the operation sign contracts in Spain, hire staff or take on liability towards third parties? | Yes | Subsidiary. A parent’s unlimited liability through a branch is rarely acceptable at board level |
| 2 | If not: is there, or will there be, a fixed place of business, office, warehouse or an agent habitually concluding contracts? | No | Non-resident entity with a Spanish tax number. Review permanent establishment risk each year |
| 3 | Do you expect losses in the first two or three years, and does the parent’s legislation allow them to be used against its own base? | Yes | Branch, with conversion to a subsidiary considered once the operation turns profitable |
| 4 | Is the parent resident in the European Union, or in a State with a double tax treaty with Spain and reciprocal treatment? | No | Subsidiary. A branch would bear the 19 % supplementary charge under art. 19.2 on amounts transferred |
| 5 | Do you need Spanish bank financing, to bid for public tenders, or to appear as an approved local supplier? | Yes | Subsidiary. A non-resident tax number and, to a lesser extent, a branch, are penalised in supplier vetting and bank scoring |
| 6 | Do you expect to sell the Spanish business within seven years? | Yes | Subsidiary. It is the only structure that transfers through a share sale in a single transaction |
If no question settles it, a reasonable tie-breaker applies: choose the lightest structure that supports the next twenty-four months, with the cost of conversion already budgeted. Converting a branch into a subsidiary is cheaper than unwinding a subsidiary that should never have been incorporated.
What do the numbers look like? Two contrasting scenarios
The two cases below are illustrations built on the rates and provisions cited above, not real transactions. They serve to locate the point at which the answer moves from one column to another.
Case A: the branch wins
Group with a parent in an EU Member State. Exploratory entry into Spain: three people, serviced office, no high-risk contracts with Spanish clients. Expected result: -180,000 euros in year one, -90,000 euros in year two, +40,000 euros in year three.
With a subsidiary, those 270,000 euros of losses are trapped in Spain as carried-forward tax losses, usable only against future Spanish profits. With a third year of 40,000 euros, the group takes many years to monetise them: the tax shield exists, but it arrives late.
With a branch, if the parent’s legislation permits the result of a foreign permanent establishment to be consolidated into its own base, those same losses reduce tax in the year in which they arise. At a 25 per cent rate in the parent’s country, that is 67,500 euros of relief brought forward by several years. On top of that there is no 19 per cent supplementary charge on repatriation, because the parent is EU-resident (article 19.3.a), no capital to fund, and no audit of a separate Spanish entity.
Case B: the subsidiary wins
Group with a parent outside the European Union. Established Spanish operation: 4.2 million euros of turnover, 22 employees, contracts with large Spanish accounts, and a planned sale of the Spanish business within five years.
On current profits there is no material difference: with turnover below 10 million, the subsidiary applies the 23 % rate for 2026 and the branch applies the Corporate Income Tax rates by reference in article 19.1. The gap opens on the exit.
Assume a sale at 3,000,000 euros against a tax base cost of 500,000 euros, that is, a gain of 2,500,000 euros. If the business sits in a subsidiary, what is sold is shares: most double tax treaties allocate taxation of that gain solely to the seller’s State of residence, with the usual exception for companies whose assets are principally real estate. If the business sits in a branch, there are no shares to sell: the assets or the business line must be transferred, and the gain is taxable in Spain at the Corporate Income Tax rate. At 25 per cent, that is 625,000 euros of Spanish tax which, in the subsidiary scenario, may be nil.
Two further costs sit outside the spreadsheet. A buyer pays less for a bundle of assets than for a company, because it absorbs more transition friction. And a non-EU parent with a branch needs a Spanish tax representative for the entire life of the operation (article 10), an obligation a subsidiary does not create.
Where the tipping point sits
The answer moves column at three specific moments, and they tend to coincide:
- When the operation stops losing money. The branch’s financial advantage runs out the day there are no more losses to export to the parent’s base.
- When the first Spanish contract with real liability appears. A tender with penalties, a guarantee or a permanent employment contract shift the conversation from tax to the group’s asset exposure.
- When a sale enters the planning horizon. From that point on, any annual saving on running costs is small against the differential on exit.
Where all three coincide, converting a branch into a subsidiary stops being an option and becomes a project with a date.
Which mistakes make this decision expensive?
Almost always the same one: deciding on a single criterion, and making that criterion the headline tax rate. These are the five errors that cost the most.
- Choosing a branch in the belief that it is taxed less. It is not, on current profits, by express reference in article 19.1 of Royal Legislative Decree 5/2004.
- Overlooking the account-filing obligation in article 375 RRM. A group opening a Spanish branch accepts, without realising it, that the parent’s accounts will be filed and publicly searchable at the Spanish Commercial Registry.
- Budgeting the entry and not the exit. The cost of dissolving and liquidating a subsidiary is the line that almost never appears in the business case, and it is the highest of the three scenarios.
- Stretching the non-resident entity beyond its limit. It works until there is a salesperson closing deals in Spain or a warehouse holding stock. From that point a permanent establishment exists, whether or not anything has been registered.
- Comparing 24 per cent of gross income with 25 per cent of profit. They are different measures. Where costs are material, the third route can be the most expensive of the three.
A full costing of the subsidiary scenario, including the recurring compliance, payroll and advisory costs that fall outside this comparison, is set out in the analysis of the total cost of operating a Spanish subsidiary.
