Incorporation of companies

The decision to start the incorporation of 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 country of destination: 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 bidding, local invoicing, etc.).
• Importance of having local presence, to show proximity to the client.
• Impossibility of being competitive as compared to 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 entity) or through a branch or representative office (permanent site without its own legal personality). The branch is, for all purposes, a foreign company. On the contrary, the subsidiary is a local trading company (Mexican, Colombian, Chilean, etc.), even if it has foreign capital.

Even if the incorporation of companies has not been formalized, a Permanent Site 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 at UR Global’s corporate consultancy meeting.

The first limitation, and possibly the most important one, is that the Permanent Site, lacking its own legal personality, does not allow the separation of responsibilities between the site 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 profits of the subsidiary or branch (30% corporate tax in Mexico) is higher than that which will be effective in Spain, so it is very convenient to use mechanisms to reduce the taxation at origin.

In this aspect, the taxable basis of the Permanent Site will always be higher than that of the branch, since the Permanent Site is taxed on the total income obtained, and payments to the head office for fees, commissions, technical assistance, transfer of assets, interest, return on equity capital, etc., are not deductible. In other words, the Permanent Site can only deduct the expenses effectively assigned to its activity.

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

The parent-branch operations most frequently carried out are:

• Technical assistance (paid with fees)
• Loans (paid off with interest)
• Administrative management support services
• Trade of goods

It should be analyzed on a case-by-case basis whether it is possible to use double taxation agreements between the Permanent Site and the parent company to enhance tax optimization strategies at the time of incorporation of companies.

To the above, it should be added that Permanent Sites face limitations and additional problems when carrying out certain procedures with the Tax Authorities (obtaining the importers’ registry, opening bank accounts, etc.), due to the fact that they are non-resident entities.

Finally, if one intends to operate with third countries, it should be kept in mind that (in general) the branch cannot benefit from the Double Taxation Agreements that the State where it resides has signed with those third countries.

• Higher competitiveness in price, since the distributor’s margin makes the product more expensive.
• Better control of customers and first-hand knowledge of the market.
• Stronger financial position to make advance payments on behalf of the imported product and VAT, which sometimes is an impediment for distributors to sell more, since they may have financial limitations.
• Preventing distributors from, after having gained customer trust, replacing parent company with a local competitor company.