B Law & Tax
02 August 2023

Tax advisor: Is it necessary to have an employee for renting to be considered an economic activity?

The great interest of savers and investors in real estate assets has tax implications in Spain, as it is necessary for real estate leasing activities to be considered as an economic activity. Without this qualification, tax benefits such as exemptions and tax burden reductions are lost.

For example, in the case of Personal Income Tax (IRPF), if leasing is considered an economic activity, the associated expenses are deductible, and it is not necessary to impute real estate income, even if the properties are not rented. On the other hand, if it is considered as real estate capital yield, expenses could not be deducted during periods of vacant properties, and real estate income would have to be imputed.

In Corporate Income Tax (IS), the classification of leasing as an economic activity has important consequences, especially in the 95% exemption on income derived from the transfer of securities of entities, according to Article 21 of the IS Law. In order to apply the implicit capital gain exemption, the entity transferred must not be a patrimonial entity.

The IS Law considers a patrimonial entity to be one that does not carry out an economic activity, where more than half of its assets are not assigned to an economic activity. In the case of the leasing of real estate, in order to be considered an economic activity and to be able to enjoy the exemption of article 21, at least one person with a full-time employment contract must be employed.

In the Wealth Tax and the Temporary Solidarity Tax on Great Fortunes (ITSGF), something similar is required for holdings in “family businesses” to be exempt. However, unlike the IS, it is not possible to meet this requirement at the level of the corporate group, since the rule refers to the Personal Income Tax Law to determine whether there is an economic activity.

In order to avoid taxation of the ownership of family companies, the Wealth Tax regulations establish exemptions for participations in entities in which the taxpayer or his family group has a certain percentage and someone of them exercises remunerated management functions that represent more than 50% of their labor and economic income.

Therefore, shares and participations in companies in which a member of the family is economically dependent are exempt from taxation. However, this exemption is denied to entities that do not carry out an economic activity and are only engaged in the management of a patrimony. The hiring of a full-time employee can convert a real estate asset management activity into an economic activity in order to take advantage of tax benefits, but its interpretation has been complex, and there are cases in which it can be fulfilled without hiring or not guaranteeing the qualification of economic activity. The lack of a clear and precise regulatory criterion creates legal uncertainty in the Spanish tax system.

B Law & Tax International Tax & Legal Advisors.

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