Global Tax Alert | 31 July 2014

Spanish Supreme Court issues resolution upholding existence of PE in Spain

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Executive summary

On 18 June 2014, the Spanish Supreme Court issued a resolution upholding that a Spanish entity belonging to an international group constitutes a permanent establishment (PE) of another British entity of the group under both the “fixed place of business” and the “dependent agent” clauses.

The resolution is of special interest in the interpretation of the “fixed place of business” clause, as it follows the trend set by the decision in the Roche case,1 which upholds the Spanish tax authorities' functional approach with regard to post-restructuring schemes and commissioner dealings involving complex business structures in Spain.

Detailed discussion


The 18 June 2014 decision refers to a case where a Spanish company (SpainCo) that had formerly operated as a full-fledged manufacturer, importer and seller of products entered into two agreements with its parent entity “BritishCo.” The business restructuring resulted in a decrease in SpainCo's Spanish tax base.

Under the first agreement, SpainCo acted as an independent sales agent of BritishCo and committed to promote sales for BritishCo under the price and conditions set by BritishCo. SpainCo did not have authority to bind or negotiate on behalf of BritishCo and it simply managed purchase orders while Britishco made all the relevant decisions.

Under the second agreement, SpainCo was directly and actively involved in the provision of logistics, administration and packaging services to BritishCo.

Simultaneously, within the context of the business restructuring, Spainco sold all its stock to BritishCo.


The Supreme Court takes the view that a comprehensive analysis of the structure and the behavior of the parties as a whole supports the conclusion that a “complex business set up” in Spain was “at the disposal” of BritishCo, and that a core part of its distribution activities in Spain – i.e., not preparatory or ancillary activities – are conducted therein, thus creating a Spanish PE under the “fixed place of business clause.”

This conclusion is mainly based on the following fact pattern, which, in the Court's view, is sufficiently proven:

  • There were no substantial changes to SpainCo's structure upon the transition to the new role.
  • The functional analysis provided to the Court showed that SpainCo assumed a substantial part of the functions related to Britishco's distribution role.
  • There was, in practice, no clear separation of functions and resources between the related entities.
  • SpainCo's human resources were at BritishCo's disposal.

Further, in the Court's view a combination of auxiliary activities cannot fall under the exception to the PE clause provided under article 5.3 of the Spain-UK tax treaty when such activities add value and are the same as the non-Spanish tax resident's core activity and SpainCo did not qualify as an “independent agent” since it was contractually bound to follow BritishCo's instructions.

In essence, the Spanish Supreme Court adopts a functional approach to the interpretation of the tax treaties.


The Spanish Supreme Court has once again reached the conclusion that a foreign corporation has a PE in Spain by combining the general clause (fixed place of business) and the dependent agent clause of article 5 of the OECD Model tax treaty. This line of reasoning may have relevance regarding the approach Spain and other tax administrations may take on the OECD BEPS works in relation to Action 7 (Prevent the artificial avoidance of permanent establishment status).

This decision represents another precedent that likely will be followed by the Spanish Tax Authorities when assessing the potential existence of PEs in similar situations. A case-by-case consideration should be given to all similar structures already in place, as well as to future conversions. Filing for an advanced pricing agreement with the Spanish tax authorities as an alternative to mitigate the risk of challenge in the event of a tax audit may also be considered.


1. For additional information, see EY Global Tax Desk Alerts, Principal structure constitutes permanent establishment, Spanish Supreme Court rules, dated 2 March 2012 and New Resolution from the Spanish Central Tax Court determines existence of a PE in Spain, dated 9 July 2012.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Abogados, Madrid
  • Laura Ezquerra
    +34 91 572 7570
Ernst & Young LLP (United Kingdom), London
  • José Antonio Bustos
    +44 20 7951 2488
Ernst & Young LLP, Spanish Tax Desk, New York
  • Cristina de la Haba
    +1 212 773 8692

EYG no. CM4627