If you are a resident in Spain and own a company registered in another country, you should know that even if your company is located outside Spain, the Spanish tax authorities have the right to be informed about your assets and the income you generate. Why is this? We explain it in the following post, along with the tax obligations you must fulfill.
Why this question matters if you own a foreign company
When you own a company outside Spain, it is easy to think that, since it is registered in another country, the Spanish tax authorities have no interest in it. However, this is a mistaken belief that can prove very costly.
The common misconception: “If it’s abroad, Spain doesn’t care”
If you are a tax resident in Spain, the Tax Agency (Agencia Tributaria) has the right to know about all your assets, regardless of whether they are located inside or outside the country. This includes the obligation to declare the existence of a foreign company, as well as any income it generates.
According to the rules on tax residency in Spain, you are considered a tax resident if you spend more than 183 days per year in the country. As such, you are required to declare your assets and rights located outside Spain, through Form 720. We will discuss these tax obligations in the next section.
Tax obligations for Spanish residents with foreign companies
As briefly mentioned, Spanish legislation establishes specific requirements for declaring shareholdings in foreign companies, the income generated, and the profits obtained. These are:
The 720 Form: declaring shares in foreign entities
Form 720 is used to inform the Tax Agency about assets and rights located outside Spain, if their value exceeds the established thresholds. You should know that shareholdings in foreign companies must be declared, regardless of whether or not you receive income from them. Failure to do so can result in severe penalties.
Taxation of dividends and salaries from your foreign company
If you receive income in the form of dividends or a salary, you should know that both types of income have tax implications in Spain. The withholding rate for dividends from foreign companies will depend on the country of origin and whether there is a double taxation agreement between Spain and that country. If you pay yourself a salary from your foreign company, this is also considered worldwide income and must be declared in your Spanish income tax return. The taxation will be similar to that of salaries earned within Spain.
What if profits are reinvested and not brought into Spain?
One common question foreign company owners ask is what happens if the profits generated by the company are reinvested instead of being brought into Spain. In principle, even if the profits are not transferred to Spain, if you are a tax resident in the country, the income obtained by your foreign company is still subject to taxation in Spain.
If the profits are reinvested within the company, you would not be taxed on the money transferred, but you would be taxed on the profits generated by the company, which includes the taxation of dividends that could be distributed in the future. Furthermore, if the company has a “permanent establishment” in Spain, taxation will apply to the profits generated in the country, even if they are not directly brought into Spain.
What if your foreign company operates in Spain?
Now let’s change the scenario a bit and see what happens if your foreign company carries out business activities in Spain. Again, Spanish regulations set out clear rules on how the activities of foreign companies operating in the country should be taxed. But to understand these obligations, you first need to know what a “permanent establishment” is. A “permanent establishment” is a legal concept that defines whether a foreign company has a significant presence in Spain, which means it must comply with Spanish tax obligations. According to Spanish tax regulations and double taxation agreements, if your company has a permanent establishment in the country, it is considered to be carrying out economic activities in Spain and must be taxed accordingly.
This permanent establishment can take various forms, such as an office, a commercial premises, employees working in the country, or even a long-term contract with Spanish clients. However, it is important to note that not all activities of a foreign company in Spain create a permanent establishment.
Sales, clients, or staff in Spain: when it triggers tax duties
If your foreign company sells products or services to clients in Spain or has employees working in the country, it will be subject to a series of taxes and fiscal obligations, such as VAT or corporate tax. If you make sales in Spanish territory, you must register your company for tax purposes in Spain. Finally, if your company has employees or representatives in Spain, they will be subject to the country’s tax and labor regulations.
Speak to an international tax lawyer. A timely check-up can save you major headaches.
Do you manage a foreign company or participate in international business? Then you should know that consulting an international tax lawyer is not only useful but necessary. Tax laws vary between countries and change constantly, which could lead to legal complications if you are not well advised.
A tax check-up will help you avoid penalties for errors in declarations, omission of assets, or failure to meet deadlines. In addition, this expert can help you optimize your tax burden by identifying benefits from double taxation treaties, applicable deductions, and exemptions. Of course, you should choose the right lawyer, verify their experience in international regulations, and their ability to offer personalized solutions.
Conclusions
In summary, Spanish tax laws are strict when it comes to monitoring operations both inside and outside the country. Strict and somewhat complex. That is why having the advice of an international tax lawyer will save you many headaches and optimize your tax situation.
