Housing rental agreement entered into by a company for a property to be used as a dwelling by an employee

The conclusions reached by the Directorate-General for Taxation in its response of 20 April 2017 to a binding consultation are relevant when negotiating and drawing up housing rental agreements where the lessor is an individual (or, as with the case in question, it is a conjugal property), the lessee is a legal person (a company) and the property is to be used as a dwelling by one of the lessee’s employees.

The Directorate-General for Taxation (DGT) specifies the necessary requirements to apply (1) a reduction of IRPF (Personal Income Tax) to revenues from capital assets deriving from housing rental and (2) a VAT exemption (Valued Added Tax) for housing rental. Through its binding consultation of 20 April 2017, the DGT abides by the doctrine of the Central Economic Administrative Court (TEAC) in its resolutions dated 8 September and 15 December 2016.

With regard to IRPF, the DGT reiterates that the legal requirement entitling the lessor to apply the reduction to the net revenue is that the property is used by the lessee as a permanent dwelling. The DGT clarifies that when the lessee is a legal entity (a company), the reduction applies if there is evidence that the property is being used as a dwelling by specific individuals. Such evidence is provided by the terms and conditions of the housing rental agreement which should provide, at least, (1) full identification of the exclusive use of the property as a dwelling for a specific individual, (2) that a change of use is not permitted without the prior written consent of the lessor and (3) assignment or sub-leasing is not permitted. Clearly, the written terms and conditions should be consistent with reality.

With regard to VAT, leases for properties that are subsequently assigned or subleased by the lessee during the course of its business are not exempt from VAT. The DGT addresses the question as to whether those cases where the rental agreement identifies the specific individuals using the property and limits its assignment and sub-lease without formalising any additional or subsequent document should be included within the scope of the exemption. It follows that in such cases, the exemption is applicable considering that the purpose of the lessee company is for the property to be used by an individual with no intention of it being used for its own business activity.

In summary, and taking into consideration the special characteristics of this case, if the housing rental agreement provides that the property is to be used as a permanent dwelling for a clearly identifiable individual and it contains clauses that limit any amendments, sub-leasing or assignment, a reduction of IRPF may be applicable and it may be exempt from VAT.