Global

Details

  • Service: Tax, Global Indirect Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Business and industry issue, Regulatory update, Survey report
  • Date: 5/1/2012

Country perspectives on taxing the cloud – Spain 

KPMG in Spain takes a look at how local tax authorities are approaching the challenge of cloud computing, by examining the potential taxes applied.

Digital distribution of a certain shrink-wrapped software

tax infographic

Permanent establishment

Under the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, Spain cannot tax the business profits of an enterprise located in another jurisdiction unless it carries out its business through a permanent establishment (PE) located within the Spanish territory. It is therefore vital to determine whether or not the vendor's activities in Spain can be deemed to constitute a PE in Spain.


Regardless, in the absence of a double tax treaty, business profits obtained in Spain by a non-resident company without a PE can also be taxed in Spain under domestic provisions, if the services rendered are fully used by the Spanish recipient in Spain, and are directly connected to the Spanish recipient's business or professional activities carried out in Spain.


Operations through a sales agent or third party channel partner

In these circumstances, an enterprise may be treated as having a PE in Spain if there is, under certain conditions, a person acting on its behalf, even though the vendor does not have a fixed place of business in Spain.


In general terms, a vendor could be deemed to have a PE in Spain for any activities that its commercial agents undertake on its behalf, if these agents have approved authority to conclude contracts on the vendor's behalf, and habitually exercise this authority in Spain.


In this respect, under the OECD Model Tax Convention (subscribed to by Spain), if a sales agent or third party channel partner are regarded as independent both legally and economically from the principal, and act in the ordinary course of their business, they would not generate a PE exposure in Spain for the vendor if they.


Operations through a website or server located in Spain

According to Spain's official Commission on e-commerce taxation, a vendor's activities may be considered as being conducted in Spain through a PE, if the vendor carries out a significant part of its activity with Spanish clients on a regular basis, generating a significant economic presence in Spain, even for the use of a website in Spain.


Furthermore, if a vendor were to have a server located in Spain, through which the website operates, this could also imply the existence of a PE in Spain.


If a Vendor were to be considered as operating through a PE, it would be taxed in Spain for the total net income allocated to the Spanish PE at a general tax rate of 30 percent, in accordance with the provisions of the Spanish Corporate Income Tax Law.


Related party transactions

From a transfer pricing perspective, marketing sales services provided by a related local sales agent should be assessed at arm's length.


Withholding tax

Spain applies a broad interpretation of the term "royalties" in connection to software payments.


Although the OECD considers payments to distribute any kind of software as business income, Spain only considers payments made to distribute standardized software as business income. , Payments to distribute customized software are regarded as royalty payments.


The character of the income derived from shrink-wrapped software must be analyzed on a case-by-case basis, to determine whether the related receipts constitute royalty income or business income.


The distinction is critical, since royalties are generally subject to Spanish withholding tax at the rate established in the corresponding double tax treaty. If no such treaty is applicable, royalties are subject to the standard 24.75 percent rate for fiscal years 2012 and 2013 (afterwards the applicable tax rate is 24 percent). However for business income, where a double tax treaty is applicable, royalties shall generally be taxable only in the vendor's country of residence - unless the business has a PE in Spain.


Shrink-wrapped computer software is usually considered as standard software, which is sold under a licensing agreement whereby the buyer is granted a limited right to use the program for business or personal purposes. The copyright or patent remains owned by the seller/manufacturer of the material, and the buyer is usually precluded from transferring or altering the program. In such transactions, distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyrights. Payments in these types of transactions would be dealt with as business profits, unless said software is somehow adapted to the specific characteristics or needs of the purchaser.


Indirect tax

Electronically supplied services are subject to 18 percent Spanish Value Added Tax (VAT) under the following conditions: the recipient has its business activity or a PE in Spain; the recipient is an individual and the provider has its business activity - or a PE that intervenes in the transaction - in the Spanish VAT territory.


For a business-to-business transaction between a provider non-established in Spain and a recipient established in Spanish VAT territory, the latter would be the VAT taxpayer, as a reverse charge mechanism would be applicable.


For a business-to-business transaction between two companies non-established in Spanish VAT territory, the electronically supplied services are subject to the special Use and Enjoyment rule. Where such a rule is applicable, the provider would be the Spanish VAT taxpayer.


For a business-to-consumer transaction, the VAT taxpayer would be the provider, who would therefore have to register in Spain for VAT purposes.


Public cloud

tax infographic

Permanent establishment

A vendor could cause a PE in Spain if the sales agent is regarded for Spanish tax purposes as a dependent agent of the vendor, with legal or de facto powers to habitually bind the vendor to third parties.


Furthermore, the mere use of a website or a Spanish-based server could imply the existence of a PE in Spain. Thus, a possible PE exposure may exist for a vendor depending, among other factors, on the volume of economic presence of this company in Spain. In such case, the net income attributable to the PE could be taxed in Spain at the general 30 percent tax rate.


Lastly, in the absence of a double tax treaty, business profits obtained in Spain by a non-resident company without a PE can also be taxed in Spain under domestic provisions, when the services rendered are fully used by the Spanish recipient in Spain, and are directly connected to the Spanish recipient's business or professional activities carried out in Spain.


Related party transactions

From a transfer pricing perspective, marketing sales services provided by a related local sales agent should be assessed at arm's length.


Withholding tax

In general terms, where income is obtained by non-residents for the use or licensing of use of rights over computer software, this income shall be considered as royalty income for Spanish tax purposes.


Regardless, when payments are made for the acquisition of data or services that include the right to download, store or operate in the acquirers' systems, (whether on a computer, network or any other device for storage, visualization or reproduction), those rights differ from the use and assignment of author rights or copyright of digital work; therefore income obtained shall not be cataloged as a royalty but as business profit.


Payments received by a vendor do not constitute royalty payments, where the license only allows the subscriber/purchaser to access the cloud, and where no rights are conferred for the use, reproduction and assignment of author rights or copyright of digital work related to the software.


Indirect tax

Electronically supplied services are subject to 18 percent Spanish VAT, when the recipient has its business activity or a PE in Spain, or when the recipient is an individual and the provider has within the Spanish VAT territory its business activity or a PE that intervenes in the transaction.


For a business-to-business transaction between a provider non-established and a recipient established in Spanish VAT territory, the latter would be the VAT taxpayer, as a reverse charge mechanism would be applicable.


For a business-to-business transaction between two companies non-established in Spanish VAT territory, the electronically supplied services are subject to the special Use and Enjoyment rule. If such a rule is applicable, the provider would be the Spanish VAT taxpayer.


For a business-to-consumer transaction, the provider would be the VAT taxpayer would have to register in Spain for VAT purposes.


Private cloud

tax infographic

Permanent establishment

A vendor should not have a PE in Spain, since it will have no business presence in this country.


Related party transactions

A vendor could charge a management fee for intra-group cloud computing services provided to its different affiliates benefiting from the cloud.


This fee can be for different services that, according to their nature, can be treated for tax purposes as either a royalty or business profit. Thus, services related to innovation technologies and/or innovation strategies might eventually be treated as royalties. A detailed analysis would therefore be required in order to determine the nature of such services and their tax treatment. The management fee must in any case be established at arm's length.


Withholding tax

Payments received by a vendor from the Spanish affiliate should not constitute royalty payments, as long as the license only allows the affiliate to access the cloud, and no rights are conferred for the use, reproduction and assignment of author rights or copyright of digital work related to the software. Thus, payments would be classified as business income and no Spanish withholding tax would be imposed.


Indirect tax

Electronically supplied services are subject to 18 percent Spanish VAT, when the recipient has its business activity or a PE in Spain, or when the recipient is an individual and the provider has within the Spanish VAT territory its business activity or a PE that intervenes in the transaction.


For a business-to-business transaction between a provider non-established in Spain and a recipient established in Spanish VAT territory, the latter would be the VAT taxpayer, as a reverse charge mechanism would be applicable.


Under a business-to-business transaction between two companies non-established in Spanish VAT territory, the electronically supplied services are subject to the special Use and Enjoyment rule. If such a rule is applicable, the provider would be the Spanish VAT taxpayer.


Under a business-to-consumer transaction, the provider would be the VAT taxpayer and would have to register in Spain for VAT purposes.

 

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Contact

Heredia Tapia Carlos Federico

KPMG in Spain

+34 93 25 32 903