Incorporation of companies

Deciding to set up a subsidiary will depend on many factors. Obviously the main one is the reality of a market opportunity and an attractive project, but there are some others that we would like to highlight and for which companies need tax legal advice in company incorporation to make the best decisions:

• Need to hire personnel in the destination country, although this could be solved by using our personnel outsourcing service, so that the company has personnel hired on our payroll.
• Requirement to be locally incorporated to develop the project (public tenders, local invoicing, etc.).
• Importance of having a local presence, showing proximity to the customer.
• Inability to be price competitive with local companies, especially for tax reasons.

The provision of services in the country can be done through a subsidiary (incorporation of a new company with its own legal personality) or through a branch or representative office (Permanent Establishment without its own legal personality). The branch is for all purposes a foreign company. On the other hand, the subsidiary is a local corporation (Mexican, Colombian, Chilean, etc.), even if it has foreign capital.

Even when the incorporation of companies is not formalized, a Permanent Establishment exists when there are facilities or workplaces of any kind in the territory, on a continuous or habitual basis, in which the activity or part of it is carried out, or when acting through a proxy agent to contract in the name and on behalf of the taxpayer. You will be informed of this in UR Global’s business consulting.

The first limitation, and possibly the most important one, is that the Permanent Establishment, lacking its own legal personality, does not allow the separation of responsibilities between the PE and its parent company, so that any commercial, tax or labor contingency will generate responsibilities for the head office.

The second limitation, of a fiscal nature, responds to the fact that the taxation (for example, in Mexico) of the subsidiary’s or branch’s profits (30%, corporate income tax in Mexico) is higher than that which will be borne in Spain, making it very convenient for the subsidiary or branch to be taxed in Spain use of mechanisms to reduce taxation at source.

In this sense, the taxable base of the PE will always be greater than that of the subsidiary, since PEs are taxed on the total income obtained, and payments to the head office for royalties, commissions, technical assistance, transfer of assets, interest, return on equity capital, etc., are not deductible. In other words, the branches can only deduct the expenses effectively allocated to the activity of the branch.

On the other hand, the subsidiary can deduct the services received from the parent company, thereby reducing its profit and thus its corporate income tax liability.

The most frequently performed matrix-subsidiary operations are:

• Technical assistance (fee-based)
• Loans (interest bearing)
• Administrative management support services
• Merchandise trade

It should be analyzed on a case-by-case basis whether it is possible to use double taxation agreements between the PE and the parent company to enhance tax optimization strategies when incorporating companies.

In addition to the above, PEs face additional limitations and problems when carrying out certain procedures with the tax authorities (obtaining an importers’ registry, opening bank accounts, etc.), due to the fact that they are non-resident entities.

Finally, if you are going to operate with third countries, it is important to remember that (in general) the branch cannot benefit from the Double Taxation Agreements that the State where it resides has signed with those third countries.

• To be more competitive in price, since the distributor’s margin makes the product more expensive.
• To have control of customers and first-hand knowledge of the market.
• To have more financial muscle to advance the cost of the imported product and VAT, which is sometimes an impediment for the distributor to sell more, since it could be financially suffocated.
• To prevent the distributor, after having the trust of the customers, from changing us for a competitor company.