The contracting of a Spanish subsidiary by another foreign entity of the group does not, in itself, imply the existence of a permanent establishment in Spain

It cannot be automatically concluded that a non-resident entity has a permanent establishment (PE) in Spain for VAT purposes, merely because it has a subsidiary in that territory or because both companies belong to the same group. The existence of a PE must be determined in light of the economic and commercial reality of the case.

In its ruling of February 20, 2025, the Economic Administrative Court (TEAC) examined the requirements that must be met in order to consider that a taxpayer has a PE in Spain for VAT purposes and in light of the last jurisprudence of the Court of Justice of the European Union (CJEU) . In the case under review, a foreign entity entered into an engineering and technical advisory services contract with an entity resident in Spain. To carry out part of the service, the foreign entity subcontracted a related company, also located in Spain. The issue was whether this subcontracting gave rise to a PE in Spain and thus whether the foreign entity was not entitled to claim a VAT refund under Article 119 of the Spanish VAT Law and Article 31 of the Regulations.

According to EU case law, a fixed place of business is considered a permanent establishment if the following requirements are met:

(i) Physical presence in a specific Member State

(ii) Sufficient degree of permanence of the place or business headquarters.

(iii) Effective performance of an activity by the PE, independently of the head office.

(iv) Availability of sufficient human and technical resources to provide services on a stable basis.

The TEAC notes that, although it is not essential to have own human and material resources to determine the existence of a PE, the resources of another company (i.e., the subsidiary) can only be considered to be part of the parent company’s permanent structure if the parent can dispose of them immediately and permanently as if they were its own. Therefore, for a subsidiary’s resources to be regarded as part of the foreign parent’s PE, it must be proven that the subsidiary is not responsible for its own resources and does not provide its services at its own risk.

Likewise, the existence of a PE cannot be inferred solely from the fact that the company has a subsidiary in Spanish territory, or because both companies belong to the same group, but must be made in light of the economic and commercial reality.