a) effective places of management, branches, offices, factories, workshops, warehouses, shops and other establishments.

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1 How to identify a permanent establishment in Spain? The identification of a Permanent Establishment (hereinafter PE ) in Spain of a non-resident entity first depends on the State in which such entity is tax resident and then on whether Spain has entered into a Double Taxation Treaty (hereinafter DTT ) with such State. In the event no DTT is applicable between Spain and the country of residence of the non-resident entity, reference must be made to the definition of PE provided for in section 13 of the Non-Resident Income Tax Act (Ley del Impuesto sobre la Renta de No Residentes), under which it is considered that a non-resident, either an individual or an entity, carries out transactions in Spain through a PE when: a) The non-resident has therein, under any title whatsoever, in a continuous or regular way, facilities or workplaces of any kind, in which it carries out all or part of its activities. b) The non-resident acts in Spain through an agent that is authorized to conclude agreements on behalf of the non- resident individual or entity, exercising regularly such powers. The same section particularly considers that the following are PEs: a) effective places of management, branches, offices, factories, workshops, warehouses, shops and other establishments. b) mines, oil or gas wells, or quarries. c) Agricultural, forestry or livestock businesses, or any other place of extraction of natural resources. d) Construction, installation or assembly sites only if they last for more than six months. In the event the non-resident entity operating in Spain is tax resident in a State with which Spain has entered into a DTT, to determine whether it has a PE in Spain will depend on the provisions of the DTT. Taking into account that Spain has subscribed 99 DTTs, a number that is expected to increase in the years to come, in most cases the existence of a PE shall be determined by the application of such DTT. At this point, we must stress that all the DTTs subscribed by Spain conform to and are based in the different OECD Treaty Models of years 1963, 1977, 1992 and in the subsequent amendments, although some Treaties, particularly some of the Treaties subscribed with less developed States, can sometimes include elements from the UN Treaty Model instead of the OECD s. Therefore, all the DTTs subscribed by Spain have a common structure, based on the aforesaid Treaty Models, similar to most of the DTTs subscribed by other States that follow the OECD S guidelines, where the PE concept (article 5) is not as wide as the one defined in the Spanish rules (as aforesaid). Most Spanish case law considers the Commentaries to the OECD s Treaty Model as a true interpretation of the DTTs, which must also be construed dynamically, and that, even with regard to Treaties entered into prior the Commentaries approval (i.e. judgements of the Supreme Court dated 11/6/2008 and 13/4/2011). Only exceptionally can specific interpretation rules be applied for certain DTTs such as those entered into with Albania, Croatia or Costa Rica. Thus, when a DTT is to be applied, the determination of the possible existence of a PE in Spain is made according to the Commentaries to the OECD s Treaty Model, which have been explained in other sections of this Guide, and, in order to avoid their repetition, we refer to the relevant sections from other True Partners Consulting members in this Guide.

2 We will next explain the scarce, though very relevant, case law and administrative practice existing in Spain on certain permanent establishments situations of entities residing in States that have entered into a DTT with Spain that set the trend for the Tax Authorities criteria. - Criteria of the General Directorate of Taxation: a) The following are to be considered permanent establishments: - the representative office of a foreign company that serves as coordination, support and control centre for the activities carried out by the main office, even though the contracting of transactions is not concluded through this office; - a Spanish entity, subsidiary of a non-resident company, to the extent the negotiation and performance of sales contracts are entrusted thereto; - electrical interconnection facilities. b) The following are not to be considered permanent establishments: - where a financial entity does have representative offices to promote its products and win customers who conclude the contracts directly with the foreign entity; - certain minor facilities (which according to the domestic rules would be PE), either warehouses in which no reselling activities are carried out, or, for instance, representative, promotion or advertising offices that do not have powers to conclude contracts and the activity of which is actually of an auxiliary or preparatory nature; - if auxiliary warehouses are available, but an independent third company carries out logistic activities without the ability to execute sales. c) With regard to electronic commerce, initially Spain lodged a reserve to the Commentaries of 2010 Model, but such reserve has been withdrawn from 2010 Model, and therefore nowadays the Commentaries to the OECD Treaty Model on this issue must be considered as applicable to Spain when determining whether a PE exists. d) Finally, the administrative practice on the substantial business structure must be emphatically stressed: In its binding rulings V and V , dated 20/11/2008, the Tax Authorities consider that there is no PE when a Spanish company that acts as a commissionaire or manufactures on behalf of another non-resident related entity maintains its functional separation. However, it would have a PE at its disposal in Spain if in the aggregate the activities carried out in Spain by both entities resulted in the existence of substantial business structure with economic coherence. And in order to establish whether such situation concurs, a functional and factual analysis of the case must be performed, as well as of the functions and risks undertaken by the Spanish entity, by itself or through the group organization, even if provided by third parties, and whether these functions are carried out on behalf of the parent company or not. Therefore the classification as PE will be determined on a case by case basis, and the conclusion must be that there is no PE provided the following circumstances concur: - lack of control of the commissionaire or manufacturer by request, which therefore ratifies its independence; - lack of commercial link for the non-resident attributed to the activity of the commissionaire company; - lack of interested fragmentation of the activities carried out in Spain; - lack of key functions and risks in the subsidiary activity; - lack of substantial operative seat in Spain.

3 - Criteria of the Courts: a) Judgement of the National High Court (Audiencia Nacional) dated the 9 February 2011: the Borax Case. Description: A non-resident entity uses warehouses to store, transform and package goods through a Spanish company (subsidiary) that also acts as agent for their sale. This situation arises from a previous restructuring where the Spanish company was manufacturer and marketer, and there have not been substantial changes with regards to the previous situation. Grounds: The activities carried out are exactly the same as prior to the restructuring. b) Judgement of the National High Court (Audiencia Nacional) dated the 9 February 2011: the Roche Case. Description: A non-resident entity operates through a subsidiary company that manufactures, promotes and distributes the products at the request of the former. Grounds: Starting from an initial consideration that the production (and not the marketing) activity is carried out by the non-resident in Spain entity through a dependent agent (its subsidiary), the status is extended, from the two existing contracts, to the two activities (manufacturing and marketing) as permanent place of business of such non-resident entity. c) Resolution of the Central Economic Administrative Court (Tribunal Económico Administrativo Central) (TEAC) dated the 15 March 2012: the Spanish Dell Case. Description: An entity resident in Ireland, that has no structure whatsoever (its costs are entirely charged by third parties), sells products in Spain through a commissionaire resident entity (belonging to the same group), and that Irish company has even some personnel and facilities in Spain. Grounds: there is a substantial business structure arising from carrying on activities for itself and on its own in Spain, particularly taking into account that this non-resident company has not enough own resources in Ireland. Thus, although the commissionaire contract states that the Spanish company acts as an independent commissionaire and not as an agent, and has no authority to create obligations in the name of the parent company, which cannot manage and control the Spanish company activities, the dependency relationship stems from other paragraphs in the same contract, listed by the inspectorate: 1. Mandatory compliance with the parent company directions. 2. Authorization of the parent company for prices and commissions. 3. Acceptance or refusal of delivery orders by the parent company. 4. Submission of regular reports to the parent company. 5. Inspection right of the parent company over the Spanish company records and premises. 6. Authorization of the parent company for the purchase of products. 7. Control of the parent company over the intellectual property rights. The consideration of the aforesaid operational structures as substantial business structures, and therefore as permanent establishments, is the so called Spanish approach, which is being applied by the Spanish Tax

4 Inspectorate, as long as it can be evidenced by facts (particularly in the case of the restructuring situations that have not altered the operational set-up in Spain). Consequences related to the acknowledgment of a Permanent establishment in Spain When determining the taxable income of the permanent establishment, a distinction is made between the general tax regime and two specific regimes, which are: the regime for permanent establishments the operations of which do not close a business cycle; and the regime for the permanent establishment with short duration activities. The general tax regime of the PEs located in Spain aligns with the Companies Tax rules, with the following peculiarities: a) Attributable income. PEs must pay taxes for the entire income attributable to them, regardless of the place in which such income has been produced or obtained, grouped in the following categories: Proceeds from economic activities carried out by PEs. Proceeds from the assignment of assets allocated to the PE. Profits or losses arising from the disposal of assets allocated to the PE. The assets functionally linked to the development of the company objects shall be considered allocated assets. b) Expenses. Deductible expenses. The PE is entitled to deduct, in addition to the expenses allowed for any resident entity, the reasonable part of the management expenses and general administrative expenses incurred in by the headquarters that are related to the PE. To that end, the following requirements must be complied with: they must be recorded in the financial statements of the PE; a record must exist, in an information report, of the amount, criteria and distribution modules of such expenses; and rationality and continuity of the allocation criteria that have been followed. Non-deductible expenses: the payments the PE makes to its headquarters or any of the PEs thereof by way of royalties, interests, commissions, consideration for technical support or for the use or transfer of other assets and rights; and the cost of the headquarter s own capital (interests and other financial charges) directly or indirectly allocated to the PE in Spain. As an exception, the interests paid by the PEs of foreign banks to their headquarters or to other PEs to carry out their activity are deductible. c) Losses offset: The losses offset regime is similar to one of the resident companies. d) Tax liability: The total tax liability is determined as the result of applying to the taxable amount the 30% general tax rate. Tax credits in the Companies Tax general regime, any tax withdrawal, tax advance payments and tax instalments paid can be applied. e) Additional taxation on the PE s income.

5 There is an additional taxation on the income transferred abroad by the PE, with the following features: It only applies to the amounts transferred abroad charged to the income after taxes obtained by the PE. The tax rate for years 2012 and 2013 is 21% (initially in 2014 it should be again 19%). The tax is not applicable to: the PEs of entities that are tax resident in other EU State, other than a country or territory that is considered a tax haven; and to the residents in countries that have entered into a DTT with Spain, in which reciprocity exists, unless the Treaty expressly sets forth otherwise (as happens, among other, in the cases of Saudi Arabia, Brazil, Canada, Costa Rica and Indonesia). f) Formal, public registration and accounting obligations. PEs are subject to the same formal, public registration and accounting obligations, as well as the submission of tax returns, as the entities residing in Spain. In any case, they must perform separate bookkeeping for the transactions they carry out and the equity elements attached thereto.