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Can a SERVER in Spain be a permanent establishment?


To the extent that the server in Spanish territory used complies with all the requirements set forth below, it would have to be concluded that such server would constitute a permanent establishment in Spain.


Permanent establishment according to the OECD:

We must first analyze the Comments to article 5 of the OECD Model Convention (MCOCDE), according to which:


Definition of "permanent establishment":

"Paragraph 1 gives a general definition of the term "permanent establishment" which contains the essential characteristics of this concept for the purposes of the Convention, i.e. a different situs, a "fixed place of business". The paragraph defines "permanent establishment" as a fixed place of business by which an undertaking carries on all or part of its business. Thus, the conditions contained in this definition are as follows:

- the existence of a "place of business", i.e. facilities such as premises or, in certain cases, machinery or equipment;

- this place of business must be "fixed"; that is, it must be established in a certain place and with a certain degree of permanence;

- the performance of the company's activities through this fixed place of business. This normally means that persons who are in one way or another dependent on the enterprise (the personnel) perform the activities of the enterprise in the State in which the fixed location is located.


When does a company have a certain space?

On the other hand, paragraph 4 determines when a company is considered to have a certain space at its disposal. It does so:

"“4. The term "place of business" covers any premises, facilities or material means used for the conduct of the activities of the enterprise, whether or not they serve exclusively for that purpose. (...) It makes little difference whether the enterprise owns or leases the premises, facilities or means, or otherwise disposes of them. Thus, the place of business may consist of a stall within a market or of a certain location permanently used in a bonded warehouse (e.g. for the storage of goods subject to customs duties). The place of business may also be on the premises of another company. This would be the case, for example, of a foreign company having permanently at its disposal certain premises, or part of them, belonging to another company.".


As the general rules have been set out so far, it should be noted that the Commentaries themselves contain a number of provisions which, under the heading "electronic commerce", seek to respond to the specific problems raised by the concept of permanent establishment in the context of electronic commerce.


How do these definitions apply to "electronic commerce"?

"42.1 It has been discussed whether the mere use of computer equipment in a country in electronic commerce transactions could constitute a permanent establishment. This raises a number of questions relating to the provisions of this article.

42.2 While the location of automated equipment operated by a company may be regarded as a permanent establishment in the country in which it is located, a distinction must be made between computer equipment that may be located in a place and constitute a permanent establishment under certain circumstances, and data and software applications - software - that are used or stored in that equipment. For example, a cybersite that is a combination of software and electronic data is not in itself a tangible good. Therefore, a cybersite does not have a location that constitutes a "place of business", since with regard to software applications and the data contained therein there are no premises, machinery or equipment. On the other hand, the server that stores the cyber site and through which it is accessed is part of a computer with a physical location, and such a location may thus constitute a "fixed place of business" of the company that operates the server.

42.3 The difference between a cybersite and the server, where it is stored and used, is important, as the company operating the server may be different from the company carrying out the commercial activity through that cybersite. For example, it is common for an Internet Service Provider (ISP) to host the cyber site through which a business operates. Although the fees paid to the ISP under such agreements may be based on the amount of disk space used to store the software applications and the data required by the cybersite, these contracts ordinarily do not imply that the server and its location are available to the company even if the company has been able to choose the server where its cybersite is hosted and the location of the latter. In such a case, the company does not even have a physical presence at that location, since the cybersite is not considered a tangible asset. In such cases, the company cannot be obliged to acquire a place of business in advance under such a supply agreement. However, if a company conducting business through a cybersite has a server, for example, owns or rents that server, where it stores and from where it uses the cybersite, the place where the server is located could constitute a permanent establishment of the company if the other requirements of the precept are met.

42.4 Computer equipment at a given location can constitute a permanent establishment only if there is a requirement to be fixed. In the case of a server, what is important is not the ability to move, but that it is actually done. For a server to be a fixed place of business, it must be located in a place for a period of time long enough to be considered fixed under the conditions of paragraph 1.

42.5 Another question is whether an enterprise's business can be regarded as wholly or partly carried out at a location where the enterprise has at its disposal computer equipment, e.g. a server. The question of whether a company does business wholly or partly through the above equipment has to be examined on a case-by-case basis, taking into account whether, because of the existence of such equipment, it can be said that the company has facilities at its disposal to be able to operate.

42.6 When a company operates computer equipment from a particular location, there may be a permanent establishment even if no personnel are needed for that activity. The presence of personnel is not necessary in order for a company to be considered as carrying on its business wholly or partly from a location where such personnel are not in fact required to carry out its activities there. This conclusion affects e-commerce to the same extent as other activities where the equipment operates automatically, e.g. automatic extraction equipment used in the exploitation of natural resources.

42.7 Another issue relates to the fact that the existence of a permanent establishment is not considered when electronic commerce transactions, carried out through computer equipment located in a particular place in a country, are restricted to preparatory or ancillary activities referred to in paragraph 4. The question of whether specific activities carried out at such a location fall within the scope of paragraph 4 has to be examined on a case-by-case basis, taking into consideration the various functions carried out by the company through such equipment. Examples of activities that would be considered as preparatory or ancillary would be:

- provide a communication link - similar to a telephone line - between suppliers and customers;

- advertising goods and services;

- transmit information through a "mirror-server" to obtain security and efficiency in operations;

- collecting market data for companies;

- provide information.

42.8 However, where such functions constitute in themselves an essential part of the business activity of the enterprise as a whole, or where other basic functions of the latter are performed through computer equipment, these should go beyond the activities referred to in paragraph 4 and if the equipment constituted a fixed place of business of the enterprise, as discussed in paragraphs 42.2 to 42.6 above, there would be a permanent establishment.

42.9 What constitutes the basic functions of a particular enterprise depends on the nature of the business it does. For example, the business of some ISPs is to exploit their own servers to host cyber sites or other applications -applicationss- of other companies. For these ISPs, the exploitation of their servers consisting of providing services to their clients is an essential part of their commercial activity and cannot be considered preparatory or auxiliary. A different example is that of a commercial company (sometimes called an e-tailer) that carries out the business of selling products over the Internet. In such a case, such a company does not operate servers and the mere fact that it can do so from a particular location is not sufficient to consider the activities carried out since the latter are distinct from preparatory or ancillary activities. What has to be done in such a case is to study the nature of the activities carried out in that location according to the nature of the business developed by the company. If these activities are merely preparatory or ancillary to the business of selling products over the Internet (e.g. the location is used, as is often the case, to operate a server that hosts a cyberspace only for advertising, presentation of product catalogues or information to potential customers), paragraph 4 applies and the location does not constitute a permanent establishment. Conversely, if the typical functions relating to a sale are performed from that location (e.g. the signing of a contract with a customer, the process of payment and delivery of the products are performed automatically through the equipment located there), such activities cannot be regarded as exclusively preparatory or ancillary.

42.10 A final issue is whether paragraph 5 may lead to the consideration of an ISP as constituting a permanent establishment. As already noted, it is common for an ISP to host other companies' cyber sites under its own Internet servers. The question that may arise is whether paragraph 5 may lead to the consideration of that ISP as constituting permanent establishments of companies engaged in electronic commerce through cyber-sites operated by servers owned and operated by those ISPs. Although this may be the case in unusual circumstances, paragraph 5 will generally not apply because ISPs will not be agents for the companies to which the cyber-sites belong because they do not have the authority to enter into contracts on behalf of those companies and will not sign such contracts on a regular basis; or because they will be independent agents acting in the ordinary course of their business, as evidenced by the fact that they host the cyber-sites of many different companies. It is also clear that, since the cybersite through which a company conducts business is not itself a "person" as defined in article 3, paragraph 5 does not apply because a permanent establishment cannot be considered to exist by virtue of the cybersite being an agent of the company under the terms regulated in that paragraph".


Tax implications in Spain of an electronic and algorithmic trading company for financial products (trading)

A number of conclusions can be drawn from the above comments to the MCOCDE regarding the requirements to be met for a server to be a permanent establishment:

- that can be considered a "place": a server, insofar as it is a computer with a physical location (as opposed to, for example, a cybersite, a combination of software and electronic data that is stored on a server, which is not a tangible good), fulfils the requirement of being considered a "place";

- which may be considered as "fixed": a server will also satisfy that requirement to the extent that it is located in the same place, without actually moving from it, for a sufficiently long period of time;

- It should be noted that the presence of personnel is not necessary to consider that a company carries out all or part of its business from one place, as the general rule already establishes;

- that such a server can be considered to be "at its disposal": how would it undoubtedly be understood, for example, if the server is owned or leased (as opposed to the case where it simply uses the software and data hosting services provided by an Internet service provider)?

- and that the activity carried out through this server is not merely preparatory or auxiliary, but that through it the main functions (core business) are carried out.


The use of a server in Spanish territory that would be located close to the Spanish trading platform, close to the target stock market. In this way, it could carry out its trading activity by reducing the communication time between servers, operating with greater agility and speed. If all the intellectual capital, management risks, hedging risks, financing risks, etc., were kept in a third country. The algorithms will be controlled remotely from the third country and there will be no staff in Spain.

To the extent that the server in Spanish territory used complies with all the requirements analysed, it would have to be concluded that said server would constitute a permanent establishment in Spain.

Since the main activity of the consultant is the "trading" or negotiation of derivative products in the European securities and derivatives markets, insofar as it could be considered that the activities of the server constitute an essential and significant part of the activity of the consultant, the server would be considered a permanent establishment, since the activity carried out in Spain could not be considered as preparatory or auxiliary.



Josep Navarro's picture
Josep Navarro es Licenciado en Económicas por la UB, especializado en Inspecciones Tributarias, con más de 25 años de experiencia en asesoría fiscal para empresas y particulares en España.