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Criteria for consideration of leasing as economic activity

The subject of leasing has come to be highly controversial regarding their tax treatment in this country because if it is considered as an economic activity it can qualify for certain benefits in order to save some money, but it can only be considered as such when it meets some certain criteria.


It is the house rental always considered an economic activity?

Initially, house rental is not considered an economic activity because, according to the administration criteria, it is not necessary use any human or material resources for this activity.


In what can benefit us consider leasing properties as economic activity?

The consideration of economic activity will affect the estimate of net income of the tax relating to income tax.

So also has implications regarding:

  • The exemption on the capital gains tax on family businesses
  • The reduction in inheritance and gift tax on the value of family negotiations or participations in companies
  • And the corporate tax, such as the rate applicable to small-sized companies, as explained later.

In which cases can it be considered as an economic activity?

Renting properties can be well developed by individuals as well as by companies, and in both cases, it is usually to usual to apply the same criteria for the purpose of considering them as an economic activity or not.

These criteria, that lay down in Art. 27.2 Income Tax Act (LIRPF), are:

  • To have a establishment in order to execute the activity
  • And a person employed full time.

Consideration of establishment

The establishment should be used exclusively for the development of the activity of leasing properties.

It can also be used a part of the premise only when the portion used for this activity can be identifiable and separate from the rest. In both cases, the premises must be unique for the development of the activity and not used for private purposes.


Consideration of person employed

The employer have to work in order to provide services relating to the management of the leasing activity, as can be:

– Look for tenants

– Management of claims

– Fixing of prices

– Working with banks, suppliers and customers

– Supervision and approval of budgets for repairs and maintenance of buildings

– Management Accounting

– Control Collection

– Etc.


And also this person have to work full time, so the DGT (Directorate General of Taxation) rejects as invalid two people employed part-time, the Act requires the whole day.

Both requirements are necessary but not sufficient

The TEAC, in its resolution of 28 May 2013 set that to declare there is being an economic activity, apart from the two requirements mentioned above, there must be a minimum workload to justify the operation performed.


If all requirements were met, then the company would be considered a company with trading activity and assets, and the income taxes of the leasing activity would be considered as an economic activity and not as a performance Equity, allowing the first choice deduct more expenses and a more beneficial regime.

Rate applicable to small-sized companies tax

It is not appropriate to apply the reduced rate of tax planning for companies of reduced dimension to organizations that do not perform economic activities, since the application of the reduced rates aims to encourage the small-sized companies to reactivate investment and employment, and this objective would be absent in the societies of only tendency of goods.


TEAC vs Supreme Court positions

The employer criterion has been discussed several times for different administrations. On the one hand some administrations tend to consider that the criteria was applicable to both companies and individuals, and in the other hand, which is the most common option, it is stated that the hired person was not crucial to consider leasing as an economic activity in its trading companies, especially in the case of entities applying the special regime regulated in art 53 TRLIS, relative to bonuses in the share of corporate tax for companies that are dedicated exclusively to house rental.


The contradiction is found between the Supreme Court and TEAC. The “Audiencia Nacional”, the Central Economic Administrative Court (TEAC) and DGT have understood that the purpose of the rule of LIRPF is to establish minimum requirements in order to consider the leasing activities as a business.


The Supreme Court on November 8, 2012 understood the business as the activity is developed and can count with a certain organization for this purpose, which may be the existence or not of employees. However the TEAC in its Resolution 2013 noted the establishment and the employee’s criteria as a prerequisite, being the most restrictive.


Unification of Doctrine: 00622/2016 resolution of 5 July

As we have explained, as it is a controversial approach, especially regarding its application in the special tax, the TEAC has been forced to UNIFY THE DOCTRINE in its resolution of 5 July 00622/2016 where in conclusion states that:


The concept of economic activity referred to in paragraph 1 of article 53 of Royal Legislative Decree 4/2004 of 5 March, approving the revised text of the Law on Income Tax ( TRLIS) must meet the requirements contained in article 27.2 of Law 35/2006 of 28 November, the income tax of the Physical People make special arrangements applicable to entities engaged in the house rental and, therefore, the planned bonus share in it.


We hope this information have been helpful for you. However, it is always good to have the opinion and work of a tax advice expert. If you have any questions do not hesitate to contact us.

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