The question at the heart of the dispute is the attribution of profits. The defence argued that, by outsourcing management to independent providers, the branch did not perform substantive functions of the management activity and, therefore, its income should not be attributable to the permanent establishment in Spain. However, the Central Tax Appeal Board (Tribunal Económico-Administrativo Central) and, in the last instance, the National Court, have considered that outsourcing services does not exempt the Spanish branch from taxation in Spain. Although part of the activity was carried out through third parties, the key decisions and operational coordination were made by the branch itself.
In essence, the ruling clarifies that the management of real estate funds, which involves accounting, asset valuation, legal notifications and investment coordination, among others, is carried out with the necessary personnel and resources – including both: internal and external resources, i.e. outsourced services. The ruling has important repercussions for the tax planning of German real estate funds in Spain. Firstly, it reinforces Spain’s power to tax the income generated by the activities of the asset managers, even in cases of alleged outsourcing. Furthermore, it emphasises that the mere contracting of services to third parties (outsourcing) is not sufficient to avoid the attribution of profits when the operational and strategic decisions are taken by the permanent establishment or branch office.
In addition to setting an important precedent for the interpretation of the applicable norms, the ruling encourages foreign funds to review their business structures and the distribution of tasks between asset managers and branch offices. Furthermore, it highlights the need for thorough analysis and adequate documentation to reliably demonstrate the functional independence of outsourced activities in order to avoid double taxation and penalties.
In short, the ruling of the Spanish National Court underlines the importance of properly structuring the acquisition of real estate assets in Spain by foreign investment funds. Additionally, it sets a precedent that could influence future interpretations by the Spanish Tax Authorities and kick off inspections for foreign real estate funds, as we have already seen, for example, regarding the VAT taxation of leased asset in Spain.