Differences between an affiliated branch office and a subsidiary

What are the main differences between a branch office and a subsidiaryThere are many differences between branch offices and subsidiaries, amongst which it is important to bear in mind the following differentiating characteristics:

  • Legal entity. A branch office is not an independent legal entity, but rather it depends completely upon the parent company. A subsidiary is a proper legal entity.
  • Share capital. A branch office does not require share capital, but in order to set up a subsidiary the minimal share capital required is 3,000 euros in the case of a private limited liability company (Ltd, SL in Spanish acronym) and 60,000 euros in the case of a public limited liability company (Plc, SA in Spanish acronym). Private limited and public limited companies are the most common company structures in Spain.
  • Company ownership. If a subsidiary is set up, the owner should be an individual who holds a Spanish Foreign National Identity card (NIE) or a foreign company which is registered with the Spanish tax authorities and holds a CIF. In the case of branch offices, the owner is the foreign parent company.
  • Parent company responsibility. With subsidiaries being independent, the responsibility is limited to the share capital invested, without the parent company having any responsibility whatsoever. However, if a branch office  were to have debts, the parent company is liable for all responsibility without limitations.
  • Governing bodies of the company. Spanish law dictates that a subsidiary should be treated in the same way as any other company; therefore, it must have certain governing bodies including shareholders meetings, a nominated director or directors who are either joint and several or acting exclusively with board powers, or a board of directors made up of a minimum of three members and a maximum of 12. A branch office  does not require a specific governing body because it depends completely upon the parent company. Branch offices usually have a legal representative with a power of attorney that has been granted by the foreign company.
  • Annual accounts. A subsidiary must produce and approve annual accounts and file them with the Spanish Mercantile Register. These documents are in the public domain and can be accessed by anyone, including rival companies. With regards to a branch office, it is sufficient to file a document with the Spanish Mercantile Register that proves that the foreign company has met its obligations abroad in the country in which it registers its annual accounts. Thus, neither members of the public nor rival companies can access these accounts.
  • Tax obligations. With regards to tax obligations, there are not many differences between those which a subsidiary and those which a branch office must comply with. Both must file tax returns and pay VAT and Corporate Income Tax.

Corporate Income Tax is levied on company income and the usual rate is 25%.  As explained in this video the annual income tax declaration must be filed within 25 calendar days following the six months subsequent to the end of the tax year (i.e. if the tax year coincides with the calendar year, the return must be made before the 25th of July each year). Interim payments are then collected in the first 20 days of April, October and December.

VAT is paid in the months of April, July, October and January (in the month of January an annual VAT report must also be filed). With regards to VAT, if a company has an annual turnover over 6 million EUR then accounts must be filed in real-time with the Spanish tax authorities via the online system called Suministro Inmediato de Información (SII)

When referring to holding companies, these can apply for the consolidated tax regime, if they meet all the requirements. Here we mention that one of the advantages of the special regime for groups of entities is that balances can be off-set on an aggregate self-assessment form, with payments being compensated by credits of other entities within the holding of companies.

Furthermore, when a company carries out intra-community operations (sales of goods or services with another company or professional individual within the European Union) they must file a 349 form, in accordance with the requirements.

On the other hand, if transactions are carried out between a subsidiary or branch office with the parent company then a document must be drawn up reflecting the transfer cost of such actions so as to prove that they were carried out at market price.

Finally, if the company in Spain has employees it is liable to two payments: IRPF and social security. If the company is solely renting a premises, but not appointing staff, then they are only liable to pay IRPF.

Which legal form should I choose for my company in Spain?

In order to choose the best way to set up a company in Spain, it is a good idea to contact a business adviser with comprehensive knowledge of Spanish legislation who can find the best solution to adapt to your circumstances.

The form you choose for setting up your business in Spain will depend upon certain aspects such as:

  • Proposed business activity. There is a big difference between proposing to act as a provider to Spanish companies and that of proposing to act in a way that requires larger volume in order to create a better impression and thus launch a permanent independent presence in Spain.
  • Engaging staff. Your company may only need one salesperson or representative in Spain; alternatively, it could require a team of employees.
  • Annual turnover. Perhaps your company can operate in the beginning with solely a CIF number and, later on, take steps to set up a  branch office or a subsidiary.

Therefore, a thorough examination of the position should be carried out to ensure the best form for your company. In no time at all you will be able to operate in Spain!

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