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Relocation of business owners to Spain and the changes in management of the business for tax purposes
Tax advice in English and German
Foreign entrepreneurs moving to Barcelona to create a new business or develop a business already existing in other countries. Tax residence of the business.
It is becoming increasingly common for young entrepreneurs to move to Barcelona to either continue or start a new business. If the business is already operating in another country, and the person moving to Barcelona is a partner, director and worker of said business, it is important to consider that the relocation of this person will generally also result in the transfer of the tax residence of the business to Spain. The reason for this is that the tax residence of a company is determined by, among other criteria, the place from which the company is managed.
When the partner of a small expanding business with few employees relocates to Barcelona, this implies that the management of the company also moves to Spain and, as such, the Spanish tax authorities can require that the profit generated by the business is taxed in Spain. This would make the management of the business much more complex, as the income would then be taxed in two different countries – Spain and the country where the business was incorporated (for its worldwide income).
If we add to this the difficulty in determining the proper taxation of the profits of partnerships in Spain, which are very common in other countries, controversy is to be expected. How should the profits of an LLC (Limited Liability Company), resident in one of the states of the USA be taxed in Spain, when the partner − although a tax resident of the company’s state of residence − is neither American nor resident in the USA from a federal point of view? And this, considering that the LLC in question is a transparent company that has decided to pay taxes at partner level and not at company level? The answer to this is not simple.
Furthermore, the activity carried out by an employee of the foreign company who has managerial power in Spain could also constitute a permanent establishment in Spain.
The latter is becoming increasingly common. This is the case, for example, of a small Spanish consulting firm which carries out its activity in the Swiss market, where it has posted workers − the partner and director − to work on various projects for a number of years. This will cause the Swiss tax authorities to require the Spanish company to register in Switzerland for tax purposes. The outcome will be that the Spanish company will have two operating entities − one from a commercial point of view in Spain, where it will continue to pay taxes on its worldwide earnings, and a permanent establishment in Switzerland (which is tax fiction, as it does not exist from a commercial standpoint) where it will also have to pay taxes for the activity carried out there. This situation creates a risk of double taxation.
In a best case scenario, that company could request exemption of Spanish Personal Income Tax on the employees’ salaries for the work done abroad, but such exemption is subject to certain requirements.