The correct taxation of non-resident income derived from the vacation rental of real estate in Spain requires an adequate characterization of such income, a complex task in the light of the regulation and the resolutions of the Directorate General of Taxes.
The taxation of income derived from vacation rentals depends on its characterization as business income or real estate capital. In the specific case of non-residents, in addition, the taxation for Non-Resident Income Tax (NRIT) purposes can vary significantly if (i) the taxpayers are resident in the European Union (EU) or in other States, and whether (ii) they obtain the income through a permanent establishment (PE) in Spain.
In the case of residents in other EU Member States, the characterization of the income as business income or real estate capital and the existence or not of PE does not generate, in general, great differences of taxation for the non-resident, since, in both cases, they may deduct the expenses associated with their activity in Spain in accordance with article 24.6 of the NRIT Law. However, for residents in third countries, the characterization of income from vacation rentals and the determination of whether they are obtained through a PE in Spain is key, since it determines whether they are taxed on a gross basis (when income is characterized as income from real estate capital or business income without PE) or on a net basis (when income is characterized as income from business income obtained through a PE).
In relation to the characterization of income, article 13.2 of the NRIT Law refers to the Personal Income Tax (PIT) rules to determine this characterization. In accordance with this reference, the Directorate General of Taxation (DGT) has resorted in numerous resolutions (among others, in its resolution V0170-25) to the PIT regulations for the purpose of characterizing the income obtained by non-residents, regardless of whether they are individuals or corporations (although this may lead to inappropriate conclusions). This same rule is applied by the DGT when dealing with non-residents applying double tax treaties, in accordance with its interpretation of the provisions of article 3.2 of the agreements (“As regards the application of the Convention (…) any term not defined therein shall, unless the context otherwise requires (…) have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies…”).
According to the PIT rules, any rental (whether or not a vacation rental) carried out by a non-resident individual or corporation constitutes an economic activity if the requirement of having an employee with a full-time employment contract – “employee requirement” – is met (article 27.2 of the PIT Law). In addition, in the specific case of vacation rentals, in numerous resolutions (among others, V0170-25 and V0723-22) the DGT has added that the lessor is carrying out an economic activity if despite not having an employee, the lessor provides the services typical of the hotel industry (such as restaurant, cleaning, laundry and other similar services). Therefore, in the specific case of vacation rentals, the income obtained will be considered income from real estate capital if there is no employee to manage the activity and, in addition, the lessor does not provide services of the hotel industry.
However, in relation to the rental of real estate in Spain by non-residents (when it is not a vacation rental), the general criterion of the DGT (V0167-25, V0076-18 and V0077-18) has been to characterize the income as business income only if the employee requirement is met. This raises the question of why, in the context of vacation rentals, the complementary services of the hotel industry (which are usually incidental or merely complementary for the lessee, whose main interest is simply the use of the leased space) are given such relevance as to characterize the entire rental income as business income, even when there is no person hired to manage the lease.
In view of the above, it might be more appropriate to consider the independence and relevance of each activity (leasing and provision of services typical of the hotel industry) to characterize the income. Moreover, this approach would be more aligned with the OECD’s view in the Commentaries on the Model Convention. For example, to determine whether payments from mixed contracts that combine software licenses with the provision of services are royalties or business profits, the OECD understands that the weight of each part of the contract must be taken into account, so that only when one part clearly constitutes the main object and the others are merely ancillary, the tax treatment of the main one must be extended to the total consideration.
In any case, if the income is characterized as business income, it must still be determined whether the non-resident individual (or corporation) operates through a PE in Spain. In this sense, in some resolutions (V1832-18, V0367-18 and V1241-17), the DGT seems to automatically link the characterization of the income as business income to the existence of a PE in Spain. However, in practice determining whether there is a PE in Spain is more complex, since the concept of PE implies elements such as stability, permanence, and the intensity or frequency of the services provided. As such, there is no one-size-fits-all solution, and each case must be assessed individually.
As we can see, although there are some administrative guidelines that help define the taxation of non-residents in vacation rentals, significant technical uncertainties still remain. Therefore, it is advisable to analyze each case individually to correctly assess its tax implications.
Elia Pons and Adrián Arroyo
