Types of business structures in Spain for foreign investors

David del Valle Díez, Commercial lawyer. AGM Abogados.

The type of business structure you will need is an important consideration when setting up a business in Spain. Each kind of business entity comes with a different set of legal and fiscal responsibilities.

This article aims at analysing the different legal business structures that currently exist in Spain. It should serve as a guidance for foreign investors to decide which structure better best adapts to the type of business they want to start in Spain.

Sole trader (autónomo)

The simplest way of setting up a business in Spain is to operate in the market as an individual, although it comes with the disadvantage of having unlimited liability for debts as there is no legal distinction between private and business assets. Otherwise it its fairly easy to become a sole trader in Spain, as it only requires registration with the tax office and social security (or an alternative regime). There is also no minimum financial investment needed to start a sole trader business in Spain.

Representative office

This option is only advisable for foreign companies carrying out preparatory or auxiliary activities in Spain, such as market research, advertising or promotion of the foreign non-resident parent company.

For the establishment of a representative office it is necessary to appoint a tax representative in Spain. This representative can be an individual or a legal person, and must have legal residence in Spain. The creation of a representative office normally includes the signature of a Notary Deed for the appointment of the tax representative and his acceptance of this position. This can be done at a Spanish Notary, or with a Notary abroad (with an apostille and a certified translation).

The representative office is not registered with the Commercial register, but the tax representative needs to submit a tax form (036) to apply for a tax identification number (NIF). For this purpouse it is necessary to provide evidence of the existence of the foreign parent Company (either included in the Notary Deed or separately) through an authenticated certificate of the Commercial Registry where the company is registered (with a certified translation if necessary).

The Representative office does not have a separate legal personality nor formal management bodies, and cannot perform other activities different from those auxiliary to support the business activity directly carried out by the parent company (which will have the responsibility to sign and execute the contracts, as well as to bill the clients). From the point of view of Corporate tax this structure avoids the parent company is considered to have a permanent establishment in Spain.

Temporary Joint Venture

Uniones Temporales de Empresa (UTE) are temporary business associations set up for a definite or indefinite time, for the purpouse of conducting a specific business project. They are usually used in construction and engineering projects, as they allow several companies to operate together. The main advantage of the Temporary Joint Venture is to combine resources of its members, sharing risks and costs between them.

The creation of a Temporary Joint Venture (UTE) requires the signature of a Notary Deed. This document should reflect the initial contribution of each party, their obligations on the project and the distribution of benefits and losses. It would then be necessary to obtain a Spanish tax identification number (NIF) and its registration with the Special Registry from the Spanish Tax Office (for the application of a special tax regime). This structure has similar requirements in terms of accounting and tax obligations as an independent Limited liability company. A Joint Venture may some times be used as a first step before full integration between companies.

Cuenta en participación: Phantom Partnership agreement

By this kind of business association one of more investors contribute to the business, receiving a variable rate of profits and losses, depending on the benefits of the activity. This kind of contract allows the investor to participate in a separate profit-loss partnership with the c, withot becoming a shareholder. It is not mandatory to sign the agreement at the Notary, but advisable to ensure its enforceability against third parties. The contributions under this partnerhsip do not qualify as capital. If there are losses, the investor will bear the same share thereof, but the responsibility is limited to losing the money invested.

Participating loans

This kind of loans serves the interest of investors willing to participate in the business of the borrower. The lender will receive a variable interest determined by the performance of the company according to different financial indicators. The lender is not considered a shareholder, but the loan is considered as equity to determine the need of a mandatory dissolution or capital reduction.

Opening a branch in Spain

The formalities, costs and requirements to create a branch in Spain are similar to those for the incorporation of a subsidiary company in Spain. Therefore to set-up a branch in Spain it is previously necessary to obtain a Tax Identification Number (NIF) of the parent Company. The two main differences regarding the set-up formalities are that the creation of the Branch would require a Notary document with the resolution to form a branch agreed by the competent body of the parent company, that the branch does not need to obtain a name certificate from the Central Commercial Registry and that it does not require any capital share.

The branch has a degree of independence from its parent company and carries out all or part of that company´s business activities. It does not have a separate legal personality and therefore the parent company will be liable for its obligations and debts. The branch needs to appoint a legal representative of the branch, acting as its attorney, which should be resident in Spain.

The branch will directly conduct its economic activities and will be able to bill its clients independently. This means the branch will have its own accounting obligations and will be considered as a permanent establishment and taxed in Spain under Corporate tax.

Incorporating a company in Spain

These Limited Liability Companies have a separate legal personality from their shareholders. There are two maint types:

• Sociedad Limitada (S.L.) or limited liabity company.
• Sociedad Anónima (S.A) or Public Limited Company.

Choosing between these two options is determined by the scale of the business, legal requirements (only S.A, can access the stock market) or the ability to raise capital from third parties. In any case the Sociedad Limitada largely prevails as the most popular option (more than 99% in 2019) to set-up a limited liability company in Spain. Below are some of the main differences between both of them:

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