The number of people living in Spain who continue to hold interests in German partnerships is steadily increasing. This particularly affects partners in a German civil-law partnership (GbR) who work from Spain or carry out their activities partly in both countries.

It is often assumed that the profits are automatically subject to German tax treatment simply because the partnership is formally established in Germany. However, this conclusion is too simplistic. From a Spanish tax perspective, merely registering a partnership in Germany or entering into a partnership agreement is not sufficient to determine the tax allocation of the income. In this article, we provide a comprehensive overview of the taxation of a partner in a German GbR who is tax resident in Spain and examine the particular issues that may arise from cross-border activities.

 

Clear-Cut Cases: Principles for the Allocation of Taxing Rights Where Substance and Activities Are Located in Germany

The tax treatment is generally straightforward where there is clear and demonstrable economic substance in Germany and the business activity is actually carried out there. This applies in particular to traditional business structures such as a hotel or guesthouse business, a trade or craft business with permanent business premises, or an agricultural GbR whose entire value creation takes place at its German location. In such cases, from both the German and Spanish perspective, it is clear that the income arises in Germany and should therefore be treated as German-source business profits. The profit is determined in Germany as part of the separate and uniform determination of income (gesonderte und einheitliche Feststellung) and allocated directly to each partner according to their respective share. For a partner resident in Spain, this means that they are subject to limited income tax liability in Germany. The German income tax levied on this share may subsequently be credited in the Spanish income tax return under the rules for the elimination of international double taxation, thereby preventing a double tax burden. It is important to note, however, that despite being taxed in Germany, the partner resident in Spain remains subject to unlimited income tax liability in Spain and must file a Spanish personal income tax return (Modelo 100).

 

Problematic Cases: Lack of Substance and Spanish Tax Claims

The situation is different where a German GbR formally exists but lacks genuine economic substance. If the partnership has no business premises, business infrastructure or employees of its own in Germany and effectively consists only of a single partner who carries out the entire activity from Spain, the Spanish tax authorities will generally not accept the allocation of the income to Germany.

This gives rise to a typical conflict: while Germany relies on the formal existence of the GbR and classifies the profits as German income, Spain considers where the activity is actually carried out by the tax resident and may therefore also claim taxing rights. The conflict does not arise from different methods of calculating the tax, but rather from the fundamental question of which country the income should be allocated to in the first place. A common misconception in practice is that advising exclusively German clients or targeting the German market is in itself sufficient to establish adequate economic substance in Germany. This is not the case. Particularly in the case of digital activities, consultancy services, remote work or structures lacking genuine operational substance, Spain may quickly take the view that the substance in Germany is insufficient to justify allocating the income there. In such cases, double taxation may arise. It may therefore be advisable to dissolve the German GbR, as from a Spanish tax perspective it may be regarded as a purely offshore structure. For further information, please also see our article: Offshore Companies: A Tempting Venture with Risks.

Between these two extremes, however, there is a broad grey area that is particularly common in practice. Many partners maintain a certain degree of substance in Germany, for example in the form of business premises, production facilities or warehouses, while they themselves, as partners, nevertheless carry out substantial parts of their activities from Spain.

As soon as a partner resident in Spain actively and regularly works for the German GbR from Spain, a further significant risk arises: Spain may consider this to constitute a permanent establishment. From a Spanish perspective, such a permanent establishment may arise not only through dedicated premises or personnel, but also where the partner permanently and substantially performs operational functions in Spain. As a result, part of the income – or potentially even the entire profit – could fall within Spanish taxing jurisdiction. Given the considerable administrative burden, different tax deadlines, parallel filing obligations in two countries and the complex allocation of income, a permanent establishment scenario should generally be avoided in practice.

Operating permanently from a home office in Spain through a German GbR is not advisable from a practical structuring perspective. In such cases, registering a foreign non-resident company in Spain would generally only be advisable through a German corporation – such as a GmbH – as partnerships such as a GbR do not provide the same legal structure for this purpose.

Possible Solutions and Structuring Options to Avoid Double Taxation

One possible solution may be to establish a Spanish limited liability company (S.L.) through which the activities carried out in Spain are formally conducted. This clearly allocates the corresponding tax liability to Spain and creates a transparent structure. However, it should be noted that if the German GbR continues to exist, unlike in the case of a GmbH, its profits will generally continue to be allocated in accordance with the partners’ respective interests. If there are several partners, consideration should therefore be given to amending the contractual profit allocation or, alternatively, to the withdrawal of the partner resident in Spain from the GbR. Such an adjustment may ensure that no German profit is directly allocated for tax purposes to the partner resident in Spain. This not only reduces the risk of double taxation but also helps prevent the Spanish tax authorities from subsequently questioning why a substantial proportion of the income is being taxed in Germany even though the operational activity is carried out from Spain.

In view of these allocation issues, we generally recommend examining whether the existing GbR structure remains suitable in the long term in cross-border situations. Where possible and economically reasonable, the complete dissolution of the GbR may be the clearest and most sustainable solution. At the same time, where both the economic substance and the business activity are clearly located in Germany, the income will generally continue to be allocated to Germany, with the credit method under the applicable Double Taxation Agreement being applied in the Spanish income tax return.

Early tax planning can help avoid risks, double taxation and subsequent disputes with the tax authorities of both countries. Particularly in the case of cross-border activities, a clear structure is essential.

As lawyers, tax advisors and a registered PAE, our firm will be pleased to assist you in analysing your specific situation, carrying out the relevant administrative procedures and preparing and filing the necessary tax returns on your behalf. Further information about our services for self-employed professionals and business owners can be found in the section Self-Employment.

If you are interested in our services or have specific questions regarding this topic, please do not hesitate to contact us by email or telephone.

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Author:

Rike Füllgraf
Tax Advisor
info@sspartners.es
Tel: (+34) 951 12 13 06
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