A permanent establishment is a fixed place of business through which a company carries on all or part of its business on a continuous or habitual basis or which act therein through an agent authorised to contract, in the name and on behalf of the non-resident, who habitually exercises such powers..

The concept of permanent establishment is transnational, so its delimitation does not correspond to each country. However, on the basis of a common definition contained in the Organisation for Economic Co-operation and Development (OECD) Convention, each State regulates permanent establishments by means of double taxation treaties as it is a tax concept.

Characteristics of a permanent establishment

1. The existence of a place of business: this means any premises or facilities that are used to carry out the economic activity of the company.
2. A fixed place of business: it must be a permanent place used for carrying out the activity. Some flexibility of mobility within the territory is allowed, although this is analysed on a case-by-case basis.
3. The figure of the dependent agent: this is a special case for the consideration of permanent establishment whereby it is determined that despite not having a fixed place of business in the territory there is a person who acts on behalf of the company. This person must act on behalf of the company and exercise powers that enable him to conclude contracts on behalf of the company. This dependent agent does not have to have an employment relationship with the company and, in fact, a dependent agent can be another entity. For example, it could be considered as a permanent establishment where a company has real estate assets and the dependent agent is responsible for signing leases or, to mention another scenario, where a person acts as a dependent agent to buy and sell products on behalf of the company even though these are not subsequently managed by him.

Case study: Resolution V0066-22 of the Spanish Directorate General of Taxes

The situation arising from COVID-19 led to exceptional circumstances that generated many doubts for companies and workers. This article is a case study of Ruling V0066-22 of 18 January 2022 on the determination of the permanent establishment of a UK company in Spain.

The UK company submits its case stating that it has an employee of English nationality who is resident for tax purposes in the UK. The employee travels frequently to Spain for personal reasons and, as a result of the pandemic, was temporarily confined in Spain. Following the confinement, he decided to stay in the country unilaterally, remaining in Spain for more than 183 days during 2020 and carrying out his work remotely.

After that period, the employee requested to continue working from Spain but the company refused, so the employee resigned in February 2021. Following this decision, the company has not hired any other employee to relocate him to Spain.

The query made to the Directorate General of Taxes (DGT) is about the consideration of permanent establishment in Spain of the UK company through its employee for the time indicated.

The DGT refers to the Spain-UK Double Taxation Avoidance Agreement, which defines what a permanent establishment is and its characteristics.

So that it could be considered a permanent establishment, it would have to have a fixed place of business in Spain through which the company carries out its activity or carry out its activity in Spain through an agent acting on behalf of the company, and detailing each of the options:

• Fixed place of business: in this case, the place where the activity was carried out was the home owned by the employee and it should be determined whether it is at the disposal of the company. It was decided in this case that the fact that the employee carried out his work from home, due to the exceptional nature of the situation, did not imply a sufficient level of permanence. It is understood that the use of the home was discontinuous and incidental. Furthermore, the DGT points out that it was the employee who decided to stay voluntarily, that the company has a place to work in the UK and that the company has not borne any of the employee's expenses in Spain
• Dependent agent: according to the information provided, the employee cannot conclude contracts on behalf of the company although it is indicated that he carries out the main activity of the company. The DGT then considers that it is unlikely to be considered a permanent establishment because it is an extraordinary event arising from COVID-19.

Therefore, the DGT determined that the company did not have a permanent establishment in Spain. In the event that the worker's stay in Spain exceeded the duration of the COVID-19 measures, the potential classification as a permanent establishment should be analyzed on a case-by-case basis.