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Branch or subsidiary in Spain: the SL subsidiary is the right answer in 90% of cases

Compare operating in Spain via a branch office (permanent establishment) versus setting up a subsidiary (SL). Legal liability, tax treatment, profit repatriation, and exit strategy for EU and non-EU companies.

Branch Office — Permanent Establishment in Spain

Advantages

  • ✓ Faster and cheaper to set up: registration at the Mercantile Registry without the need for paid-in share capital or a full incorporation deed
  • ✓ No minimum share capital: no requirement to contribute equity funds when establishing the branch
  • ✓ Losses directly transferable to the foreign parent: negative results flow to the group without requiring liquidation or dividend procedures
  • ✓ Simplified corporate structure: no Spanish shareholders' meeting, local board of directors or separate annual accounts filing required in some cases
  • ✓ Ideal for short-duration activities or projects with a defined time horizon without long-term permanence intent
  • ✓ Facilitates billing between the branch and parent as a direct extension of the same legal entity

Disadvantages

  • ✗ Unlimited parent liability: the foreign company is fully responsible with all its assets for obligations incurred by the Spanish branch
  • ✗ The branch is not a separate legal entity — Spanish creditors can pursue the parent company's assets abroad
  • ✗ Obligation to file the parent's annual accounts (not just the branch's) at the Spanish Mercantile Registry — full group transparency
  • ✗ No direct access to the Parent-Subsidiary Directive (2011/96/EU) exemption for profit remittances to the parent
  • ✗ More complex employment relationships: some collective bargaining agreements and trade union negotiations are more difficult without an independent Spanish entity
  • ✗ Perception of lower commitment to the Spanish market — clients, suppliers and banks prefer a locally incorporated entity with its own legal standing

Subsidiary — SL or SA incorporated in Spain

Advantages

  • ✓ Limited liability to the capital invested: the parent company does not answer for the subsidiary's debts absent express guarantees or corporate veil piercing
  • ✓ Independent legal entity: its own legal personality, tax number, bank accounts, contracts and assets separate from the parent
  • ✓ Full access to the Parent-Subsidiary Directive (2011/96/EU): dividends paid to an EU parent with 10%+ participation held for 12 months are exempt from Spanish withholding
  • ✓ Greater credibility with Spanish clients, suppliers and financial institutions — facilitates bank account opening, framework contracts and public tenders
  • ✓ Easier to hire employees in Spain under Spanish labour law with greater clarity and lower risk of disputes
  • ✓ More flexible exit strategy: the subsidiary can be sold as an asset (share deal) or only sell the assets (asset deal) with greater tax and legal clarity

Disadvantages

  • ✗ Incorporation cost and time: notarial deed, Mercantile Registry registration, tax number — EUR 1,500-3,000 and 1-4 weeks
  • ✗ Minimum paid-in share capital (EUR 1 for an SL, with the practical recommendation of EUR 3,000 to avoid additional liability)
  • ✗ Full accounting and filing obligations: annual accounts, corporate income tax, periodic VAT and IRPF withholding returns — higher compliance cost
  • ✗ Subsidiary losses do not automatically flow to the foreign parent — intercompany mechanisms (loans, capital increases) are required for compensation
  • ✗ Transfer pricing: transactions between parent and subsidiary must comply with the arm's length principle and be documented per Article 18 CIT Act (and OECD guidelines)

Our verdict

The subsidiary (Spanish SL) is the correct structure for 90% of foreign companies seeking stable operations in Spain. Limited liability, access to the Parent-Subsidiary Directive, credibility in the Spanish market and exit flexibility are advantages the branch cannot match. The branch only makes sense for projects with a short time horizon (maximum 2-3 years), for specific construction or service contracts, or where sector regulation specifically requires a registered permanent establishment.

Two ways to enter the Spanish market

When a foreign company decides to operate in Spain on a stable basis, it has two main routes: registering a branch office (an extension of the foreign company in Spanish territory) or incorporating a subsidiary (a new Spanish legal entity, generally an SL, controlled by the foreign company).

The choice is not merely administrative: it has direct consequences for the parent company’s legal liability, the taxation of profits generated in Spain, the ability to attract local talent and clients, and the ease of any eventual exit from the Spanish market.

Quick reference: branch vs subsidiary

FeatureBranchSubsidiary (SL)
Separate legal personalityNoYes
Share capital requiredNoEUR 1 minimum (EUR 3,000 recommended)
Parent liabilityUnlimitedLimited to capital invested
Parent-Subsidiary DirectiveNot directlyYes (participation ≥10%, 12 months)
Annual accounts filingYes (includes parent accounts)Yes (subsidiary accounts only)
Profit remittance levy19% (unless CDI eliminates)0% (EU Parent-Subsidiary Directive)
Transfer pricingNot between branch and parentYes, mandatory
Incorporation time2-4 weeks1-4 weeks
Closure/liquidationSimplerFormal liquidation process

Limited liability: the primary reason

The most important difference between a branch and a subsidiary is the foreign parent’s legal liability.

A branch is not a separate entity: it is the foreign company operating in Spain. Any Spanish creditor (supplier, employee, the tax authority, a bank) can pursue the parent company’s assets abroad if the branch cannot meet its obligations. This includes the parent’s real estate in other countries, foreign bank accounts and shareholdings in other group companies.

A subsidiary is an independent legal entity. The parent only loses what it has invested in the subsidiary’s share capital, except in exceptional cases of corporate veil piercing (fraud, manifest undercapitalisation, patrimonial confusion). A Spanish client in litigation with the subsidiary cannot go directly against the parent, and a Spanish bank that is not repaid cannot enforce the parent company’s assets in Germany or the US.

For most foreign companies, this risk asymmetry alone justifies incorporating a subsidiary.

Taxation: when the branch can be competitive

The branch and subsidiary tax at the same nominal rate (25%), but the difference lies in profit repatriation.

Subsidiary profits paid as dividends to an EU parent holding 10% or more, maintained for 12 months, are exempt from Spanish withholding under the Parent-Subsidiary Directive (2011/96/EU). The dividend reaches the foreign parent without Spanish withholding tax.

Profits remitted by a branch to its parent are subject to the additional 19% levy on transferred profits, unless the applicable tax treaty eliminates it. Many tax treaties signed by Spain eliminate or reduce this additional levy, but not all, and subject to specific conditions.

For groups with a parent in the EU or in countries with a favourable tax treaty, the effective tax burden can be equivalent or very similar. For companies with parents in countries without CDIs or with limited CDIs, the subsidiary is systematically more efficient for profit repatriation.

Transfer pricing: the added obligation of the subsidiary

The subsidiary introduces an obligation the branch does not have to the same extent: transfer pricing. All transactions between the Spanish subsidiary and the foreign parent are related-party transactions that must be valued at arm’s length and documented.

This includes:

  • Management or support services provided by the parent to the subsidiary (management fees)
  • Royalties or licences for brand, technology or know-how
  • Intercompany loans (arm’s length interest rate)
  • Purchase or sale of goods between group entities

The AEAT has intensified transfer pricing audits on foreign companies with Spanish subsidiaries. The compliance cost (local and group documentation) can reach EUR 5,000-15,000 annually for mid-sized groups, but the risk of not documenting correctly (adjustment plus 15% penalty on the adjustment) is exponentially greater.

When the branch still makes sense

Despite its structural disadvantages, the branch remains appropriate in specific contexts:

  • Construction or engineering projects with a duration of less than 3 years, where the full corporate infrastructure of a subsidiary is not warranted
  • Specific service or works contracts of significant value where the client requires contracting directly with the foreign company
  • Market testing during an initial 12-18 month period before deciding whether to establish a permanent subsidiary
  • Regulated sectors where the administrative authorisation is faster for a permanent establishment of a company already authorised in another EU Member State

In all these cases, the branch is a temporary or specific solution, not a permanent structure for a stable commercial operation.

The process of converting a branch to a subsidiary

Many companies that started operations in Spain through a branch need at some point to migrate to a subsidiary. This process involves:

  1. Incorporation of the new SL subsidiary (1-4 weeks)
  2. Transfer of contracts, employment relationships and assets from the branch to the subsidiary (process that may require client and supplier consent)
  3. Novation of employment contracts maintaining seniority
  4. Closure and deregistration of the branch from the Mercantile Registry
  5. Notification to the AEAT of the structural change

The complete process can take 2-4 months. The main risk is the need for third-party consent (clients with contracts signed with the foreign company, financial institutions with security over branch assets). Planning the migration with sufficient lead time avoids operational disruptions.

FAQ

Frequently asked questions

Legally, a branch is a form of registration in the Spanish Mercantile Registry of a foreign company's activity. For tax purposes, what matters is the concept of a 'permanent establishment' (PE) under Article 13 of the Non-Resident Income Tax Act and applicable tax conventions. A PE arises when the foreign company has in Spain a fixed place of business where it carries on all or part of its activity: a registered branch always constitutes a PE, but a PE can also arise without a registered branch (a dependent agent with authority to conclude contracts, a construction project lasting more than 12 months, etc.). Many foreign companies without a registered branch nonetheless have a tax PE, with the corresponding tax obligations.
Branch profits are taxed under the Non-Resident Income Tax (IRNR) at the 25% rate, the same as the Corporate Income Tax rate for a subsidiary. The difference lies in profit repatriation: a branch pays an additional 19% levy on profits remitted to the parent (unless the applicable tax treaty eliminates this or the Parent-Subsidiary Directive applies by analogy), while a subsidiary pays dividends that benefit from the withholding exemption under the Parent-Subsidiary Directive (2011/96/EU) if the conditions are met. For EU-based groups with correct planning, the effective tax burden on profit repatriation is equivalent or favourable for the subsidiary.
Yes. A non-EU company (US, Asian or Latin American, for example) can operate in Spain through a registered branch. However, it loses automatic access to the Parent-Subsidiary Directive and must analyse whether the tax treaty between Spain and its country of residence eliminates the additional levy on profit remittances. For companies from countries without a tax treaty with Spain or with limited treaties, the tax burden of the branch can be significantly higher than a subsidiary, which benefits from the CDIs applicable to its outbound dividends.
The transformation of a branch into a subsidiary does not automatically transfer the employment contracts — employees of the branch are employed by the foreign company, while the subsidiary is a new Spanish entity. The transfer of employees requires either a novation of the employment contracts (maintaining seniority and conditions) or, if preferred, a termination from the branch and new engagement with the subsidiary. The most common option is agreed novation, which preserves continuity for the employee and avoids severance payments. This process must be managed with Spanish employment law advice to ensure correct application of the applicable collective bargaining agreement and Social Security obligations.
Transactions between a foreign parent company and its Spanish subsidiary are related-party transactions subject to Article 18 of the CIT Act and the OECD Transfer Pricing Guidelines. They must be valued at arm's length: management services, royalties, intercompany loans, and intragroup sales of goods or assets. The documentation obligation (group and local documentation) is triggered when the aggregate amount of related-party transactions exceeds EUR 250,000 per transaction type in the year. The AEAT has significantly increased transfer pricing audits on foreign companies with Spanish subsidiaries: the penalty for inadequate documentation can reach 15% of the adjustment applied.

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