The concept of ‘economic activity’
Broadly speaking, the regime for entities engaging in the leasing of housing (REAV), which is set out in the current Corporate Income Tax Law (LIS) and in the now repealed Revised Corporate Income Tax Law (TRLIS), enables entities which have opted for taxation under this regime to apply an 85% reduction against gross corporate income tax payable on revenues from the leasing of housing, and a reduced rate of 4% for VAT purposes on acquisitions of housing properties, provided that the revenues obtained from the subsequent leasing of such properties qualify for application of the aforementioned reduction.
Although the REAV regime was originally applicable to entities whose corporate purpose consisted exclusively of the leasing of housing, for tax periods commencing as from November 20, 2005, the rule is that this regime may be applied by entities whose main economic activity is the leasing of housing located in Spanish territory.
Both the Directorate-General of Taxation—in numerous rulings issued in response to ruling requests by taxpayers—and most Courts of Justice have taken the view that following the legislative change referred to, an entity wishing to apply the REAV is expressly required to engage in the leasing of housing as an economic activity. Since there exists no definition of the concept of economic activity in the TRLIS itself, the question of whether or not there exists such an activity is to be determined—based on an integrative interpretation of the legal system—in accordance with article 27.2 of the Personal Income Tax Law (LIRPF), as worded at the time (a premises used exclusively for the management of the activity and a person hired for such purpose under a full-time employment contract).
A similar conclusion was reached by the Central Economic-Administrative Tribunal (TEAC) in its ruling of July 5, 2016 in respect of an appeal seeking the unification of doctrine. Its finding was that the concept of “economic activity”, referred to in the now repealed TRLIS, meant that compliance with the provisions of article 27.2 of the IRPF Law was required for the REAV to be applicable.
For tax periods commencing as from January 1, 2015, however, the definition to be considered for these purposes is the definition of economic activity consisting of the leasing of real estate set out in article 5 of the LIS, which requires that such activity be managed by at least one person hired under a full-time employment contract, although with the possibility of taking into consideration for such purpose all the companies of the same corporate group, based on the criteria established in article 42 of the Commercial Code. It should be noted, however, that in several recent judgments, the Supreme Court has ruled that the use of the minimum resources referred to (an employee and premises for tax periods commencing before 1.1.15 and an employee for periods commencing after such date) is not sufficient, and that such resources must actually be necessary in order to pursue the leasing activity for it to be classed as an economic activity.
Garrigues Tax Department
This article was published on Diario Sur