According to the most recent criterion of the Directorate General of Taxes (DGT), real estate leasing can be classified as an economic activity for Corporate Income Tax purposes when managed by specialized experts who have been subcontracted, even if there is not a full-time employee exclusively dedicated to its management, as literally required by law.
Article 5.1 of the Corporate Income Tax Law (LIS) establishes that, to consider real estate leasing as an economic activity, it is necessary to have at least one person employed with a full-time employment contract in charge of its management. This requirement is considered fulfilled when verified within the group of companies and not in the entity itself. This requirement is particularly restrictive for many real estate companies and foreign investors, especially those opting for outsourced management models, which are common in the Spanish market.
The classification of an activity carried out by a Corporate Income Tax taxpayer as an economic activity is an essential requirement for the application of certain incentives (as it is for other taxes, such as Personal Income Tax or wealth taxes). For example, this requirement determines the application of (i) the exemption to avoid double taxation on capital gains obtained from the transfer of companies, (ii) the special 15% tax rate for newly created entities, (iii) the small companies regime, or (iv) the international fiscal transparency regime. In the real estate sector, the existence of an economic activity is, in fact, one of the requirements for the application of certain special regimes, such as those for entities dedicated to housing rental (EDAV) or listed corporations for investment in the real estate market (SOCIMI).
The employee requirement did not exist in the tax regulations prior to 2015 but was already being demanded by tax authorities and our courts by reference to Personal Income Tax regulations (along with the requirement of having a separate premises dedicated exclusively to this activity, a requirement now eliminated). Since the fiscal years beginning after 2015, as indicated above, this requirement has been expressly incorporated into the tax law.
Despite the legal requirement of this condition since 2015, the DGT has been flexibilizing its scope, understanding that this requirement is met when the management of the lease is carried out through the subcontracting of a specialized and professionalized manager in cases where the complexity and circumstances of the lease require it.
This criterion was maintained in numerous tax rulings issued until 2018 (among others, in V2508-18). Almost six years later, the recent tax ruling V0090-24 has finally come to establish this more flexible criterion and, given the years that have passed since the last resolution in 2018, has aroused interest in the real estate sector.
The case analyzed on this occasion refers to an entity belonging to an international real estate group with a portfolio of over 720 million euros in assets, which subcontracted the management of its leased real estate assets to a specialized company.
The DGT concludes that, given the specific circumstances of the particular case, the requirements are met to consider that there is an economic activity, even when the entity does not have a full-time employee exclusively dedicated to managing the leasing activity. Among these circumstances, the following are highlighted: (i) the complexity and size of the managed leased assets (32,000 square meters, with differentiated uses), (ii) the high business volume and income, (iii) the also high number of tenants, (iv) the complexity of the managed real estate asset (which required specialized and professionalized management), or (v) that the multinational group has the same management model in all countries where it operates (without employees dedicated to lease management and always resorting to outsourcing management with professional entities).
This criterion, which seems already established after this new resolution, at least from the DGT’s point of view, adapts to the reality of the rental market in Spain. However, Article 5.1 of the LIS continues to require in a strict and clear manner the fulfillment of the full-time employee requirement, without exceptions, for the real estate leasing activity to be classified as an economic activity. For this reason, it is possible that courts will continue to issue judgments with criteria contrary to that of the DGT, such as the recent judgment of the Superior Court of Justice of Madrid of October 18, 2023 (appeal 836/2021).
This judgment analyzes the case of a company owning 15 rental homes. The court recalls that, since 2015, Corporate Income Tax regulations explicitly define the concept of economic activity and require that, for real estate leasing to qualify as such, there must be an employee with a full-time employment contract managing the activity. Accordingly, it concludes that this requirement must be literally met in its strict terms “without the concept of economic activity being extended beyond the cases established by Law.”
Moreover, the DGT does not resolve or even raises new questions, still unresolved, given that, according to its criterion, it seems that not all subcontracting situations will automatically allow understanding that the economic activity requirement is met. Specifically, considering its conclusions, it is worth asking what is the minimum threshold of complexity or business volume from which the subcontracting of the management of the leasing activity with a third party is considered justified.
Another different question that arises in this matter is whether, despite the company having personal means to manage the lease (i.e., employee or management contract), these means are really “necessary” for the development of the activity (in such a way that, if they are not necessary, the presence of these means will not determine the existence of an economic activity for tax purposes). This additional requirement of “necessity” of the employee (or, where appropriate, the management contract) presents special complexity, given that it is not possible to have full certainty under what conditions such necessity can be understood to exist, having to attend to the specific circumstances of each case. In the case analyzed in the aforementioned judgment of the Superior Court of Justice of Madrid, for example, the Regional Economic-Administrative Court of Madrid had considered that the management of 15 homes was not sufficient to be able to understand that a full-time employee dedicated to its management was needed and, consequently, denied the existence of an economic activity (certainly a striking criterion when the EDAV regime itself requires only that the company have at least 8 properties for rent to be able to apply the special regime). Undoubtedly, this is an additional requirement not exempt from controversy and uncertainty.
In conclusion, the new DGT consultation, although it again confirms a more flexible interpretation adapted to the business reality of the concept of economic activity in real estate leasing, does not end up clearing all the doubts and controversies existing on this issue (especially when, as we see, there are Courts that maintain a diametrically opposed criterion). It seems desirable, then, for the legislator to modify the tax regulations to clear up and reflect more precisely, concretely, and rationally the requirements for real estate leasing to qualify as a business activity for tax purposes, attending to the current business reality of the real estate sector. All this, in order to provide taxpayers with adequate legal certainty, avoid litigation on this issue, and thereby facilitate the normal development of real estate leasing activity in Spain.
