For Spanish entrepreneurs considering e-Residency to launch their businesses in Estonia, understanding the concept of permanent establishment (PE) is essential. Permanent establishment (PE) determines the particular country in which your company is subject to taxation and can shape how your business operates across borders. The critical question is whether your company’s value is primarily created in Spain or if its business substance will be predominantly located in Estonia. This distinction plays a crucial role in determining your tax obligations and business strategy.
What Defines a Permanent Establishment?
A permanent establishment arises when a company’s key management decisions are made in a particular jurisdiction. For Spanish entrepreneurs operating through an Estonian company, the following factors could indicate PE status in Spain:
- Board Members’ Residency: If board members reside in Spain, their involvement may create a taxable presence for the company.
- Decision-Making in Spain: Day-to-day operational or strategic decisions made within Spanish territory may indicate residency in Spain for tax purposes.
In such cases, at least a part of the company’s income may be subject to Spanish taxation. This reflects the principle of ensuring taxation is aligned with where value is created and managed.
Characteristics of an Internationally Focused Business
If your Estonian company is primarily managed and operated outside of Spain, it may not be classified as having a PE in Spain. Key indicators of this include:
- Board members’ residency: Members of the management board reside in Estonia or other jurisdictions outside Spain.
- Role of Spanish shareholders: Spanish-resident shareholders have limited involvement in day-to-day management and focus on passive roles, such as receiving dividends.
- Centralised decision-making in Estonia: All significant management decisions are conducted in Estonia, supported by thorough documentation.
- Substance in Estonia: Proof of active operations in Estonia—like hiring employees, renting an office space, or building a local client base—demonstrates the business’s substance and value beyond Spain.
Tax Compliance and Spanish Authorities’ Enforcement Measures
It is important for businesses to comply with tax regulations in all relevant jurisdictions. Some entrepreneurs might consider avoiding certain taxes by not disclosing the existence of a Permanent Establishment (PE) to Spanish tax authorities, but this approach is both risky and contrary to ethical business practices. Spanish tax authorities have effective mechanisms to enforce compliance with PE rules, making attempts to conceal activities unlikely to succeed.
NB!
Spanish tax authorities wield extensive enforcement powers to uncover and verify economic activities within their jurisdiction. Here are some of the specific measures they employ:– Debit card monitoring: Reviewing debit card transactions to identify purchases made in Spain by individuals associated with an Estonian company.
– Access to bank statements: Examining bank account records to trace financial activities and confirm connections to Spanish operations.
– Analysis of traffic data: Utilizing traffic camera data to determine if personal vehicles linked to these individuals have been driven within Spanish territory.
Navigating Tax Obligations with PE in Spain
If your Estonian company qualifies as a PE in Spain, it simply means the company has a recognised taxable presence there. Importantly, tax treaties and international agreements are in place to prevent double taxation. For instance, profits taxed at the PE level in Spain are typically not subject to further taxation in Estonia. This ensures a fair and transparent tax treatment for cross-border businesses.
Strategic Growth: Consider Expanding Your Operations in Estonia
As your business grows, transitioning its operational substance to Estonia could unlock new opportunities. Estonia offers entrepreneurs a range of advantages, including a well-educated, multilingual workforce, world-class digital infrastructure, a transparent and competitive tax system designed to foster business growth, and access to venture capital to fuel innovation. Over time, this transition could lead to becoming a tax resident of Estonia, reducing your tax obligations in Spain and streamlining your operations under one jurisdiction. Whether you choose to maintain a taxable presence in Spain or shift your operations to Estonia, the decision depends on your broader entrepreneurial goals. However, Estonia’s pro-business environment, combined with its digital-first approach, provides a compelling case for making it your entrepreneurial home.
Need Expert Guidance?
Both maintaining a PE in Spain and building business substance in Estonia are valid paths, depending on your business goals. At Magrat, we provide tailored services to support entrepreneurs navigating these decisions. Whether you’re managing compliance with Spanish tax laws or establishing operations in Estonia, we’re here to help. Additionally, we always encourage seeking advice from local tax experts to ensure your company’s compliance with applicable regulations.