The lease of dwellings can be classified as an economic activity under Spanish tax legislation

The classification of real estate leasing as an economic activity is an essential requirement for the application of certain tax incentives, such as those applicable to the family business regime. These will affect wealth tax, inheritance and gift tax, solidarity tax on large fortunes or the regime of entities dedicated to the lease of dwellings. In particular, it is necessary to have a minimum infrastructure, a minimum asset size and, at least, one full-time employee dedicated to manage the real estate leasing.

Minimum asset size

It is essential that the entity has the sufficient workload to justify the need for material and human resources (one person employed on a full-time contract) to manage the real estate leasing. The number and size of the leased properties may be indicative of the workload generated by the leasing activity.

However, given that the tax regulations governing the leasing of real estate as an economic activity do not establish a minimum number of properties, the Directorate General of Taxes – by reference to article 47 of the corporate income tax law that regulates the regime of entities dedicated to the lease of dwellings – accepts that the management of at least eight dwellings justifies the need to have an employee.

In practice, this requirement is not very controversial. Except in some cases where properties require special treatment, meeting this minimum asset-size requirement is usually sufficient to justify the need to hire an employee.

Full-time employee

Article 27.2 of the personal income tax law regulates the requirement to have a person employed on a full-time employment contract. Likewise, in 2015, the corporate income tax law introduced an autonomous definition of real estate leasing as an economic activity.

Specifically, article 27.2 of the personal income tax law establishes that "real estate leasing is deemed to be an economic activity only when at least one person employed on a full-time contract is used to manage it" and article 5.1 of the corporate income tax law sets forth that "in the case of real estate leasing, economic activity shall be deemed to exist only when at least one person employed on a full-time contract is used to manage it".

However, this requirement has become more flexible and, sometimes, depending on the type of tax and the context analysed, it is understood that this requirement is met when the management of the leases is carried out through the subcontracting of a specialised and professional manager rather than by a full-time employed person in those cases where the complexity and the circumstances of the lease require it.

Additional points and FAQs

• Self-employed professional. The law does not provide the possibility of the professional managing the leases being self-employed. An employment relationship is required.
• Part-time employees. The requirement is not met by having two employees on a part-time contract. At least one employee must be engaged full time.
• Outsourcing of the service. As regards corporate income tax, the Directorate General of Taxes has accepted that the requirement to have a person employed on a full-time contract can be replaced by subcontracting the management of the leased real estate assets to specialized third parties where the economic reality of the company so requires, given the business volume and the scale of the activity to be carried out.
• Full-time contract. The requirement to have a full-time employee exclusively dedicated to managing the leasing activity has been a matter of debate. Until now, consultations of the Directorate General of Taxes establish that the employee must be employed full time to manage the leasing activity and, therefore, if the employee dedicates part of his time to practice an activity for his own account or to work for another taxpayer, this requirement is not meet.
• Natural person. The lease of real estate owned by a natural person must have been managed by an employee on a full-time contract for a minimum of three years from date to date. If the real estate is to be contributed to a company, this period is necessary for the leasing of real estate to qualify as an economic activity. Provided that valid economic reasons are met, the tax neutral regime provided for in article 87 of the corporate income tax law (special regime for mergers, spin-offs, transfer of assets or exchange of securities) would apply, which would entail the application of certain tax benefits such as the deferred taxation of capital gains on the contribution of real estate to a company.

Does the fact of having a person employed mean that the tax authorities will automatically accept the leasing of real estate as an economic activity? No, it does not. The important thing is that an employee on a full-time employment contract is required for the management of the leasing activity.

Osborne Clarke comment

The classification of real estate leasing as an economic activity depends on whether certain requirements are fulfilled, that is, having a minimum number of dwellings and an employee on a full-time employment contract.

Although the Directorate General of Taxes and the Economic Administrative Court have relaxed these requirements in certain cases, it is important to consider the economic reality of the company and the restrictions that may be applied. The flexibility introduced by case law offers new opportunities for companies in the real estate sector, but it is essential to understand and comply with these requirements to make use of the tax incentives and the special tax regimes available.