Spain: VAT implications of manufacturing and distribution agreement; permanent establishment of non-resident company

Spain: VAT implications of manufacturing agreement

The Spanish Supreme Court in a November 2020 decision analyzed whether a Spanish subsidiary could be deemed to be a permanent establishment of a non-resident company (a Swiss company) for value added tax (VAT) purposes.


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  • The Spanish subsidiary entered into two different agreements with the Swiss company—one for manufacturing goods, and a second one for distributing the finished goods.
  • The Swiss company considered that it was not operating in Spain by means of a permanent establishment, and thus did not charge VAT on its sales in Spain (given that the reverse charge mechanism was applicable). The Spanish tax authorities, however, concluded that there was a VAT permanent establishment and that the reverse charge mechanism was not applicable.
  • The company objected to the position of the tax authorities, and the issue eventually ended up before the high court. 

Court decision

The Supreme Court agreed with the tax authorities and determined that there was a VAT permanent establishment and that VAT must be charged on the domestic sales.

The high court concluded that the Swiss (non-resident) company was in fact operating in Spain through a fixed place of business (that is, the factory, warehouse, and offices of the Spanish subsidiary) and by means of activities conducted by the Spanish subsidiary. The high court observed that the Swiss company provided instructions as to how the goods were to be manufactured by the Spanish subsidiary’s employees and using the material resources of the Spanish subsidiary.

The court also noted that the Swiss company controlled the goods that were to be manufactured, established the deadlines for selling the goods, and set the price; that the Swiss company reimbursed the Spanish subsidiary for all costs borne in Spain; and that the Swiss company assumed all the risk of the activities carried out in Spain (basically, all the activities conducted in Spain by the Spanish subsidiary, such as the manufacture, transport, quality control, and packaging were performed by the Spanish company on behalf of the Swiss company).

KPMG observation

While the decision in this case focused on a VAT determination, a substantially similar analysis could also possibly affect a determination whether there is a permanent establishment from a non-resident tax perspective. Therefore, any entity that has a similar structure may need to consider an analysis from both an indirect and direct tax point of view, given that a VAT permanent establishment could also be deemed to be a permanent establishment for direct tax purposes.

Read a December 2020 report [PDF 92 KB] prepared by the KPMG member firm in Spain

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