If your company rents properties, you may think that your company has a business activity. However, for this activity to be considered an economic activity and not just a rental activity, the tax authorities have a key rule: you need a full-time employee.
The problem is that this requirement is not interpreted in the same way for Personal Income Tax (IRPF) and Corporation Tax (IS). Lets see the differences.
IRPF: If you do not have employees, you do not have a business.
If you declare the rental of properties for personal income tax purposes and you want the tax authorities to consider it as an economic activity, it is essential that there is a full-time employee with an employment contract managing the rentals. If this requirement is not met, the income will be classified as rental income rather than as an economic activity, which limits the tax benefits available.
Furthermore, the tax authorities do not accept half-baked solutions. It is not enough to hire a freelancer or a management company, as the person who manages the rentals must have an employment contract with the company. Neither is it acceptable for a employee to have another full-time job at the same time, as it is presumed that the employee cannot be devoting 100% of the time to the management of the rents.
On the other hand, for the activity to be considered really economic, there must be a sufficient workload to justify the hiring of an employee. If only two or three dwellings are rented out, it will be difficult to convince the tax authorities that a full-time person is needed to manage them.
Corporate Income Tax (IS): More flexibility, less headaches.
In the Corporate Income Tax, the full-time employee requirement also exists, but it is applied in a more flexible way. Having a full-time employee is still the most straightforward way of proving that there is an economic activity, but there are other options to meet this requirement.
One of them is when the company is part of a business group. In this case, the tax authorities allow the management of rentals to be carried out by an employee of another company in the group, without the need for each company to have its own specific employee for this function.
Another alternative is subcontracting. If the company hires a third party to manage the rentals, the tax authorities can accept that there is an economic activity, provided that this third party has the appropriate means to carry out the activity. However, outsourcing is only considered valid if the management of the real estate is sufficiently complex. For example, in the case of a 30,000 m² office building, the tax authorities have accepted outsourcing. However, in the case of a company with only nine rental properties and an annual income of 70,000 euros, the tax authorities did not consider it sufficient.
Conclusion: Do you have a business or do you only rent?
If you want the tax authorities to recognise your rental activity as a business, it is essential to meet the requirements. For personal income tax purposes, without a full-time employee, the activity will be treated as a rental activity and not as an economic activity. For corporate income tax, there is more flexibility, as subcontracting or management within a business group is allowed, but only under certain conditions.
Before declaring your rental income, check that you comply with what the Tax Authorities consider necessary to be a real business. You do not want any unpleasant surprises when the time comes to account for it.
