Expanding to the Canaries as a foreign company: branch, subsidiary or permanent establishment

A German engineering firm wins a maintenance contract at a Fuerteventura resort. A British software company hires two developers who want to live in Corralejo. An Italian retailer signs a lease in Puerto del Rosario. Each of them faces the same question in the first meeting, and most answer it by instinct: do we open a branch, set up a company, or just start? Spanish tax law gives the question three doors and a trap. The subsidiary — a Spanish SL owned by the parent — and the branch — the parent itself, registered here — are the two doors a company chooses. The permanent establishment is the door that opens on its own the day a fixed place or a signing employee exists in the islands, whether or not anything was registered. This piece sets the three side by side: what each one is, what each one pays, which Canary incentives each one keeps, and how a company avoids being taxed for an establishment it never meant to have.

The three vehicles on one page

A subsidiary is a Spanish company — almost always a sociedad limitada — whose shares the foreign parent holds. It has its own legal personality, its own capital (as little as one euro since 2022, with the strings our autónomo-or-SL guide describes), its own directors and its own liability: a claim against the Spanish business stops at the Spanish balance sheet. It is born at a Spanish notary and registered at the Companies Registry like any local company, and its dealings with the parent — services, licences, loans — are related-party dealings, priced at arm's length and documented as such.

A branch is not a separate person. The Spanish rules define it as "a secondary establishment endowed with permanent representation and a certain autonomy of management, through which the company's activities are carried out in whole or in part" (Reglamento del Registro Mercantil, art. 295). It is the foreign company itself, present in Spain through an office and a permanent representative with powers, registered at the Companies Registry of the branch's domicile on the strength of legalised documents proving the parent's existence, its current statutes and its directors, plus the deed that establishes the branch (art. 300), with the representative's identity and powers on the record (art. 297). The parent answers for the branch's debts with everything it owns, and it must deposit its own annual accounts — or, where its home law does not require accounts in an equivalent form, accounts drawn up for the branch's activity — at the Spanish registry every year (arts. 375–376).

A permanent establishment is a tax fact, not a corporate choice. Spanish law deems a foreign company to operate through one when "by any title it has in Spanish territory, continuously or habitually, installations or places of work of any kind, in which it carries out all or part of its activity, or acts through an agent authorised to contract in the name and on behalf of the taxpayer, who habitually exercises those powers", and lists the usual suspects: management seats, branches, offices, factories, workshops, warehouses, shops, and construction or installation works lasting more than six months (Ley del Impuesto sobre la Renta de no Residentes, art. 13.1.a). A registered branch is always a permanent establishment; an unregistered office, a rented desk, or an employee who signs contracts from a flat in Caleta de Fuste can be one too.

What each one pays: the same rate, different plumbing

The rate is the first surprise: it is the same. A subsidiary pays corporate tax on its worldwide profit at the corporate rates; a branch or any other permanent establishment pays on the income attributable to it — the profits of its activity, the yield of the assets attached to it and the gains on their disposal (LIRNR, arts. 15.1 and 16.1) — "at the rate applicable under the Corporate Tax rules" (art. 19.1). In 2026 that is 25 % in general, with the reduced 19–21 % and 23 % rates for smaller companies that our salary-or-dividends guide sets out — and one caveat that decides most cross-border cases: in broad terms the turnover test that unlocks those reduced rates is applied to the whole group, not to the Spanish entity alone, so the small Spanish arm of a large parent pays 25 % whichever vehicle it uses.

The plumbing differs in three places.

Payments to head office. A subsidiary deducts what it pays its parent for licences, interest and management services, provided the price is at arm's length. A branch does not: in computing the establishment's taxable base "payments the permanent establishment makes to its head office … as royalties, interest, commissions, in consideration of technical assistance services or for the use or transfer of goods or rights shall not be deductible" (art. 18.1.a), while a reasonable share of the parent's management and general administration costs is deductible if it is booked, explained in a memorandum filed with the return and allocated on rational, continuous criteria (art. 18.1.b). A group that lives on intra-group licences has just found its answer.

Taking the money home. A subsidiary distributes dividends, and Spain withholds 19 % at source (art. 25.1.f) unless a rule lifts it. For an EU parent holding at least 5 % for a year, the EU Parent–Subsidiary regime lifts it entirely (art. 14.1.h). For a parent outside the Union, the treaty decides: the United Kingdom treaty of 2013 caps the withholding at 10 % and exempts dividends paid to a UK company that controls at least 10 % of the Spanish payer (Convenio España–Reino Unido, art. 10.2); the Germany treaty of 2011 allows 5 % for a company holding at least 10 % and 15 % otherwise (Convenio España–Alemania, art. 10.2), which the EU rule then reduces to zero. Royalties paid to a British or German parent are taxed only in the parent's country under both treaties (art. 12 of each). A branch has no dividends: it remits. The law charges a complementary tax of 19 % on amounts the establishment transfers abroad out of its income (art. 19.2) — but not where the parent is resident in another EU Member State, nor where it is resident in a treaty country that grants reciprocal treatment (art. 19.3), which in practice takes British and German parents out of it.

The person who answers to the tax office. A parent outside the Union that operates through a permanent establishment must appoint a representative resident in Spain before its first return is due, and notify the appointment within two months (art. 10.1). For EU parents the general rules of representation apply.

A worked example. A British company with group turnover above the small-company threshold makes a €200,000 profit in Fuerteventura. As a subsidiary: corporate tax €50,000, net profit €150,000, dividend to the UK parent (which owns 100 %) exempt from Spanish withholding under the treaty — €150,000 arrives in the UK. As a branch: the same €50,000 of tax on the attributable profit, no complementary tax on the remittance under the treaty's reciprocity — the same €150,000 arrives, on one balance sheet instead of two. The arithmetic is identical; the difference is what the parent could deduct (the licence fee the branch cannot), what the parent risks (everything, through a branch) and what the parent must publish (its own accounts, through a branch).

The Canary incentives travel with the establishment, not with the legal form

The islands' regime was written for establishments, and that sentence decides more than it seems. The RIC — the investment reserve that shelters up to 90 % of retained profit from corporate tax, explained in our RIC guide — is granted to entities "in relation to their establishments located in the Canary Islands" (Ley 19/1994, art. 27.1): a branch qualifies, and so does a subsidiary. The DIC, the 25 % credit on new fixed assets in our investment-credit piece, is extended expressly to companies without a Canary tax domicile "in respect of the permanent establishments located in this territory", with the credit's ceiling applied separately from whatever the head office may claim (Ley 20/1991, art. 94.2).

The ZEC, the 4 % rate of our ZEC guide, is open to both doors on equal terms: ZEC entities are "legal persons and newly created branches" registered with the Consortium (Ley 19/1994, art. 31.1), provided the registered office and the effective management sit in the islands, at least one director — or, for a branch, one legal representative — resides in the Canaries, the activity is on the ZEC list, and the entity invests at least €50,000 and creates at least three jobs on Fuerteventura within the deadlines (€100,000 and five jobs on Tenerife and Gran Canaria) (art. 31.2). The rate is 4 % on the part of the base earned in the ZEC area (arts. 42–43), and the registration window closes on 31 December 2026 unless Brussels renews the map.

Two registrations do not care which door you chose. Any business operating in the islands through an establishment registers with the Canary tax agency for the IGIC before it starts — the census declaration is Modelo 400 — and files the IGIC returns instead of VAT ones, the difference our IGIC-versus-VAT guide explains. And an employer of any form registers with Social Security before the first payslip.

The accidental permanent establishment

The trap is the establishment nobody registered. Two developers hired by a British company work from their flats in Corralejo; a German firm's project manager runs a nine-month installation from a site office; an Italian company's "sales representative" negotiates and closes contracts with island hotels from a home office. Spanish law asks two questions of each: is there a fixed place of business at the company's disposal, or a dependent agent who habitually concludes contracts in its name? Answer yes to either and the foreign company has a permanent establishment in Spain — taxable on the profit attributable to it, obliged to keep accounts for it, to file corporate-style returns for it and, if the parent is outside the Union, to appoint a representative — from the day the facts began, with the tax office reconstructing the base afterwards.

The treaties refine the test without removing it. The UK treaty, like most, defines the establishment as a "fixed place of business through which the business of an enterprise is wholly or partly carried on", lists the same seats and offices, lengthens the construction threshold to twelve months, and carves out places used only for storage, display, purchasing, information gathering or other "preparatory or auxiliary" activities (Convenio España–Reino Unido, art. 5). An employee's home is where the argument lives. The Directorate-General for Taxes accepted in January 2022 that a British company had no establishment while an employee worked from his Spanish home under the pandemic's restrictions, because the arrangement lacked permanence — and warned that a stay extending beyond those measures would be examined case by case. In broad terms, the questions the tax office asks since then are the ones a company can answer in advance: does the company require or pay for the home office, does the employee sell or only execute, does the arrangement have a duration, and is there a Spanish address on the company's cards.

The cure is to decide, not to drift. A company that wants people in the islands but no taxable presence keeps them to genuinely auxiliary work and short stays, or hires them through a local employer of record; a company that will sell, sign or run works here opens the branch or the subsidiary first, so that the establishment exists on paper before it exists in fact.

Choosing: a decision in five questions

• Will the Spanish business need its own credit, partners or exit? A subsidiary can take a local shareholder, be sold, or be financed on its own accounts; a branch cannot.
• Does the parent want the Spanish liabilities ring-fenced? Only the subsidiary does that.
• Does the group live on intra-group licences or management fees? They are deductible for a subsidiary and not for a branch.
• Does the parent mind publishing its accounts in Spain? A branch deposits the parent's; a subsidiary deposits only its own.
• Is speed or simplicity decisive? A branch has no capital, no separate directors and one balance sheet; a subsidiary is a new company with everything that implies — including, for a group under the turnover thresholds, the reduced corporate rates and, for a parent in the Union, dividends that leave Spain untaxed.

Whichever door, the ZEC, the RIC and the DIC are on the other side of it; the fourth door — the accidental establishment — is the only one worth avoiding.

Where we come in

Our business desk in Caleta de Fuste and Costa Calma models the two vehicles on your real figures, incorporates the SL or registers the branch with its representative, files the ZEC application where the activity qualifies, registers the IGIC census and the employer accounts, and reviews the people you already have on the island so that no establishment is discovered before it is declared. See business advisory, commercial law and tax advisory, or book a consultation — we reply within one business day.

Common questions

Is a branch taxed differently from a subsidiary in Spain?
At the same corporate rates, on the profit attributable to it. The differences are in the plumbing: a branch cannot deduct royalties, interest or management fees paid to its head office, deducts only a reasonable share of head-office overheads, and faces a 19 % complementary tax on remittances that EU parents and most treaty countries are spared; a subsidiary deducts arm's-length payments to the parent and distributes dividends subject to 19 % withholding, lifted for EU parents and reduced or lifted by treaty for others.

Can a foreign company's branch join the ZEC?
Yes. ZEC entities are legal persons and newly created branches, provided the registered office and effective management are in the Canary Islands, a director — or the branch's legal representative — lives in the islands, the activity is on the ZEC list, and the investment and job thresholds are met: €50,000 and three jobs on Fuerteventura within the deadlines. The rate is 4 % on income earned in the ZEC area.

When do remote employees create a permanent establishment?
When the company has a fixed place of business at its disposal in Spain, or an agent who habitually concludes contracts in its name. An employee's home can be that place if the arrangement is permanent and the company requires or uses it; the Directorate-General for Taxes accepted in 2022 that a pandemic-era home office was not one, and warned that longer arrangements are judged case by case.

How are dividends from a Spanish subsidiary taxed on the way out?
Spain withholds 19 % unless a rule lifts it. Dividends to an EU parent holding at least 5 % for a year are exempt. Under the UK treaty, dividends to a British company controlling at least 10 % of the Spanish subsidiary are exempt and otherwise capped at 10 %; under the German treaty, 5 % for a 10 % holding and 15 % otherwise, before the EU exemption applies.

Facts verified in September 2026 (Non-Resident Income Tax Act, RDLeg 5/2004, articles 10, 13, 14, 15, 16, 18, 19 and 25; Companies Registry Regulation, RD 1784/1996, articles 295 to 302, 375 and 376; Law 19/1994, articles 27, 31, 42 and 43; Law 20/1991, article 94; the Spain–United Kingdom treaty of 14 March 2013, articles 5, 10 and 12; the Spain–Germany treaty of 3 February 2011, articles 10 and 12; DGT binding ruling V0066-22 of 18 January 2022; the Canary tax agency's Modelo 400 page). Figures are worked examples on 2026 rates; your own will differ.