Rented Properties: exempt from Wealth Tax?
A key question from the tax perspective for companies which engage in the leasing of real property assets is whether these operations can be classed for tax purposes as an economic activity.
This is particularly important in relation to the direct taxation of shareholders who are individuals, since it is only when the leasing of real property is pursued as an economic activity that the holdings in the company qualify for an exemption from Wealth Tax (IP), and where appropriate, for a 95% reduction for the purposes of Inheritance and Gift Tax (ISD).
Interestingly, the situation with respect to the classing of operations of this kind as an economic activity can differ depending on the tax being assessed. For IP purposes, for example, the question of whether an asset is used in economic activities is determined by applying the Personal Income Tax (IRPF) rules, whereas for inheritance tax purposes in Cataluña, it is the autonomous community legislation which is applicable.
Up until 2014, the tax rules applicable for both IP and ISD purposes stipulated that the leasing of real property was only to be classed as an economic activity when there was at least one worker hired under a full-time contract, and a premises, both employed exclusively for the management of the real estate activity.
For IP purposes, the reforms of Corporate Income Tax (IS) and IRPF, which have been in force since January 1 2015, have flexibilized the requirements to be met for leasing operations to be classed as an economic activity, by eliminating the requirement that there be a premises used exclusively for the purposes of the activity, and also by stipulating that in the case of companies forming part of the same corporate group (within the meaning of article 42 of the Commercial Code), the question of whether these operations constitute an economic activity is to be assessed taking into account all the companies making up the group.
Due to this change, corporate groups with different companies which engage in the leasing of real property assets do not need to have a hired employee in each particular company for the leasing operations of each one to be classed as an economic activity, and are able to concentrate their resources within a single group company.
The Directorate General of Taxation has recently tended towards viewing family groups with ownership interests in different companies under a unified management structure in which there exists no holding company by which all the shareholdings are owned, as “coordination” groups falling outside the scope of the corporate group defined in article 42 of the Commercial Code, meaning that each single company must meet the pertinent requirements individually.
In structures of this kind, the fact that there is no holding company within which ownership of the shareholdings is concentrated can therefore lead to duplication of human resources for the IP exemption to be applicable in respect of each company. In the case of ISD, the Catalan legislation continues to require the existence of a premises for the leasing operations to be classed as an economic activity, and although the legislation applicable does not expressly envisage this, the autonomous community government has accepted in a ruling the possibility of resources in the case of corporate groups being concentrated within a single group company.
Garrigues Tax Department