Property rental has become one of the most profitable economic activities in existence today. It is no coincidence that many groups of companies have set up a subsidiary for the exploitation of real estate through renting, given the interesting profitability ratios they obtain from the monetary surplus, compared to other types of investments.
For this reason, it is important to be aware of the specific casuistry that surrounds the activity of renting property when it is a company that carries out the activity, and the special tax regime for the rental of dwellings provided for in the Corporate Income Tax Law.
Concept of economic activity
Article 5 of Law 27/2014 of 27 November on Corporate Income Tax (LIS) defines the concept of economic activity, and expressly establishes in the case of leasing, that "economic activity shall be deemed to exist only when at least one person employed under a full-time employment contract is used to manage it".
This requirement to have a person employed on a full-time contract of employment may seem similar to that required for personal income tax purposes when it is a natural person who exploits the property, however, administrative doctrine and our Courts have been somewhat more lax when it comes to validating compliance with the requirement.
Thus, for example, administrative doctrine has accepted that the management of rentals by the institution is outsourced to specialised third parties (e.g. consultancy or real estate), "where the management of the business of letting property requires, given the scale of the activity to be carried out by the applicant and the volume and importance of its income, the provision of a business organisation of its own or through third parties', and therefore, in this case, the requirement to be considered an economic activity would be deemed to be met (CV3199/2017 of 13 December).
Similarly, in the case of groups of companiesThe economic activity is deemed to exist even if the employee has a full-time contract of employment and is engaged in the management of the leasing of the real estate. is an employee of a different entity of the same group to the owner of the properties. (CV3915/2015 of 9 December 2015)
And, with regard to the assumption that many companies are facing, about if the administrator of the company (who may also be a partner in the company) may be the contracted person in charge of the management of rentals for the purposes of considering that there is economic activity, the DGT has been admitting this possibility "if there is a contract that is classified as an employment contract under the employment regulations in force, (...), and said contract is full-time and remunerates the performance of the activity of leasing real estate, remuneration other than that which, where applicable, may correspond to the position of administrator". o "provided that receive his remuneration for carrying out the activity of leasing real estate, other than that which, as the case may be, he may be entitled to by virtue of his position as a directorand the requirement laid down in the aforementioned article shall therefore be deemed to have been met". (CV 2747-20 of 9 September and CV V1458/2015 of 11 May, respectively).
In any case, the DGT has also been demanding that a minimum infrastructureas cited in Binding Consultation 2747-20 of 9 September, stating that "en the specific case of the activity of renting property, the consideration of this as an economic activity requires a minimum infrastructure, with a minimum organisation of means in order to be able to acquire such a character. The aforementioned organisation of means is specified in the existence of a person employed under a full-time employment contract to carry out the activity".
Implications of the existence of economic activity.
In this sense, the consideration that a company carries out an economic activity has certain tax implications, such as, among others:
- The possibility of applying the incentives foreseen for small entities,
- Entitlement to the family business exemption under Wealth Tax,
- Or the possibility of applying the family business reduction in Inheritance and Gift Tax.
Special Regime for Entities dedicated to the Lease of Dwellings
Due to the reduced housing stock in the Spanish market in comparison to the growing demand, the corporate income tax has regulated a special regime that incentivises the rental activity of housing, regulating it with a very interesting effective taxation.
1) To whom does it apply?
It is an optional scheme and can be chosen by companies that have as a main economic activity is the rental of dwellings located in Spain, which may have been acquired by the company, built or promoted.
In addition, it is possible for the company to combine it with other complementary activities.
2) Eligibility criteria
- That it has as its the business activity of leasingand must therefore meet the requirement of having a person employed on a full-time contract of employment.
- They should having 8 or more dwellings rented or offered for rent, at any time during the tax period.
It is important to note that it is expressly required that is intended for the permanent residence of the tenantThe regime does not apply to seasonal rentals, such as tourist rentals or those rented on a monthly basis. This is regulated by Article 2.1 of Law 29/1994, of 24 November, on Urban Leases, which establishes that "...".A residential tenancy is a tenancy of a habitable building for which the tenant has the right to primarily to meet the tenant's permanent need for housing."
- Housing must remain leased or offered for lease for at least three years.
After this period has elapsed, the company can transfer the dwellings and does not lose the right to the scheme as long as he/she continues to meet the other requirements, including that he/she continues to have 8 or more dwellings rented or offered for rent.
- They should take a separate accounting for each property that is acquired or built, so that the income generated by each property can be known.
- And, if they are carried out complementary activities to the rental of housing, at least 55% of the income generated is derived from rental income or, alternatively, 55% of the assets are capable of generating rental income from residential property.
And, for the purposes of calculating the 55% of income, income generated by the transfer of real estate is not computed.
3) What is the tax rebate or tax credit that applies to me?
If all the requirements of the regulations are met, a rebate of 85% is applied to the part of the tax liability corresponding to the income derived from the rental of dwellings. who meet the requirements.
And, in order to determine this income, the income obtained from the rental of the dwelling must be taken, minus the tax deductible expenses directly related to the rental and the part of the general expenses that correspond proportionally to the aforementioned rental income.
- Numerical example
Let us look at a numerical example of how this bonus would be applied:
+ Income for the year: €160,000with the following breakdown:
- Rental income from 8 dwellings: €140,000 (87.5%), at a rate of €17,500/year per dwelling.
- Income from other ancillary activities: €20,000 (12.5%)
– Expenditure for the year: €30,000
- Costs for 8 dwellings: 25,000 €, at a rate of 3,125 €/year per dwelling.
- Other overheads: €5,000
Result for the year: €130,000, which would correspond to the taxable income for IS purposes. This €130,000 can be broken down as follows:
- Income (result) from rental of dwellings: 110.625 €according to the following calculation:
+Rental income from dwellings: 140.000 €.
- Expenses incurred for the rental of dwellings: 25.000 €.
- Other proportionally allocated overheads (87.5%): 4,375 €.
2. Income (result) from other activities: 19.375 €. (remaining amount)
Total resulting tax liability (25%): 32.500 €.
- Tax liability attributable to the leasing activity: 27,656.25 €.
- Tax charge attributable to other activities: €4,843.75.
Rebate (85%) applicable to the quota from the rental of dwellings: 23.507,81 €.
- Total tax payable: 8.992,20 €.
As can be seen, the application of the special regime has meant in this example a effective tax rate of 6.91% on the profit realised, compared to the standard rate of 25%.
4) Incompatibilities
The choice for the regime must be communicated to the Tax Administration and is only compatible with certain special regimes, such as the special tax consolidation regime, the mergers and acquisitions regime and the international tax transparency regime.
On the contrary, the small enterprises who are entitled to apply certain tax incentives, must choose to apply either this housing rental scheme or the abovementioned ERD incentives, and it is not possible to reconcile them.
Similarly, this bonus is incompatible with the application of the capitalisation reserve.
5) Limitations on the exemption under Article 21 LIS
Article 21 of the LIS regulates an exemption from 95%. on the distribution of dividends or capital gains generated by the transfer of shares, when certain conditions are met.
In cases involving an entity that applies the regime of entities dedicated to the letting of dwellings, it is important to bear in mind that this exemption of article 21 LIS will be reduced by half if:
- Dividends derive from undistributed profits which were subsidised, with the first distributed profit being deemed to derive from undistributed income.
- And in the case of the transfer of shares, these correspond to companies that have applied this regime and the income derived from the transfer corresponds to reserves from retained earnings at a subsidised rate.
This limitation seeks to avoid, in part, a double tax advantage on the same income; on the one hand, a tax credit and, on the other hand, a deduction to avoid taxation on the distribution of these tax credits.
6) Can I sell the properties?
Yes, the scheme allows the transfer of real estate after 3 years have elapsed since the purchased, constructed or developed dwellings were first rented out.
And, if the properties were already owned by the company when the entity applied the regime and were already rented, the 3-year period starts from the beginning of the first tax period in which the special regime is applied.
7) What happens if the company fails to comply with any requirements?
If any of the requirements are not met, such as not having 8 dwellings rented or offered, or transferring any property before the 3-year period has elapsed, in the tax period in which the non-compliance occurs, it shall not be possible for the entity to apply this special regimeTherefore, the tax credit could not be applied to any of the income obtained.
However, This does not preclude that, in taxable periods The entity does not renounce the scheme until it does not renounce the scheme, the same can continue to be appliedprovided that all the requirements for this are met.
As can be seen, there are many different cases that can arise with important tax implications, so we always recommend that you consult your trusted tax advisor before starting the activity of renting property in order to carry out correct tax planning and avoid future risks.
