According to a recent ruling of the Spanish Supreme Court (June 21, 2013), for a company to be considered the category of small or medium and small-sized enterprise (Spanish PYME), and to benefit from the existing incentives in the Spanish Corporate Tax (reduced tax rates and deductions), it is required that the company exercises a business activity, even if the volume of income obtained in the year is less than 10,000,000 euros: a basic requirement for a company to be considered as a PYME.
This circumstance has great implications. The so-called mere holding companies, which would include those dedicated to the lease of real estate and that do not have a full-time employee, because the same, and thus do not carry out any business activity and must not be considered as PYME, would pay a fixed tax rate of 30%. This is something not many advisors know.
According to the Spanish Law on Personal Income Tax, the rental of real estate is carried out as an economic activity if you have a full-time employee, and a business premises where such activity takes place. This criterion is the one that also would be applicable for corporate tax purposes.
It is completely surprising that the Supreme Court in Spain has reached this conclusion, adopting the criteria maintained by the Tax Agency as its own, when there were resolutions of Administrative Economic Courts that adopted the opposite thesis, among others, TEAR Valencia (11/22/2011) or TEAR Galicia (12/15/2011).
One of the main reasons to disagree with the resolution adopted by the high court, is based on the fact that the preamble of Law 35/2006, which repealed the regime of property companies in force since 2002, states that the legislator, by eliminating the special regime of patrimonial companies, wanted said companies to be taxed under the general regime of the Corporation Tax without any specialty, and even less for it to be necessary to resort to an terminology that exists in a tax applicable to natural persons (IRPF) and not to legal entities.
The Supreme Court in Spain, endorsing the thesis of the Tax Administration, interprets restrictively the will of the legislator when the reality is that if the will of the Law were to exclude the application of the reduced tax rate for certain companies, the legislator would have said so expressly (as it is done in many laws), and in addition it would have defined with a minimum precision what is understood by mere holding companies to which not to apply said incentive.
Because of this, it is very likely that the Treasury -as it did a while ago- will once again send out massive “parallel” notifications to rental companies that have not followed their criteria and have applied the reduced rate of PYMES. If this is your case, we recommend you consult your advisor in order to find the best way to solve this situation, and check if your advisor is correctly liquidating your tax settlements.