Corporate rental is a recurring topic that often causes confusion. This article provides useful information for landlords and investors who rent to companies or are interested in doing so.
It covers the December 2016 legislative change on VAT and the necessary requirements in the rental contract to be exempt from it.

Regulatory change in corporate rentals

The Tribunal Económico-Administrativo Central (TEAC) issued a ruling in December 2016, confirming a previous ruling in September 2016, which modified the way VAT is applied to this type of leasing.

Previously, corporate rentals were subject to 21% VAT in all cases. However, the TEAC ruled that rentals for use as an employees’ usual residence are exempt from VAT.

A number of conditions must be met for the exemption to apply.

Conditions for VAT exemption

In order for the house or apartment rented by a landlord or owner to a company for its employees to be exempt from VAT, the following conditions must be met in the rental contract:

  • The rental cannot have any other purpose than to serve as a residence for the employee and his or her family. It must be specified that the rental is for residential use only. This makes it clear that there is no possibility of carrying out any kind of business or commercial activity in the rented property.
  • The contract must indicate the person or persons who will live in the property. This means that the employee of the company who will be staying in the house must be clearly identified.
    It is not enough to say “for use by company employees”. It must literally state the name and surname of the employee who will be living there. This will make it clear that it is for exclusive use as the home of an identified natural person.
  • The rental contract must expressly prohibit the possibility of sub-renting or cession the property to other persons than those specified in the contract.
    This clause is essential as it guarantees that the property will be used exclusively as the home of the identified employees. By legally preventing subletting, any commercial or business use of the property is prevented.

In summary, if the rental is for exclusive use as a residence and the natural person who will reside there is identified, it can be considered exempt from VAT according to these resolutions.

Additional tax benefit for homeowners

The TEAC allows the application of a 60% reduction in personal income tax (IRPF) for rental of property intended for residential use, where the landlord or owner is a natural person and the tenant is a company/society, as long as it is proven that the rental is for residential use of a natural person specified in the contract (employee).

This represents an additional tax advantage in these contracts where the company appears as the tenant but the rental or use goes to an employee.

Corporate rental: regulation of temporary contracts

Although not explicitly defined, it is understood that a temporary rental contract between a legal entity or a company and an owner, which identifies the natural person who will reside in the property (employee), is considered comparable to a rental contract of habitual residence and therefore exempt from VAT.

However, in order to benefit from the 60% IRPF deduction, the owner or landlord must be a natural person.

Temporary rental vs. permanent housing  

Although the 60% IRPF reduction in personal income tax for renting a habitual residence may seem attractive, there are other advantages to renting a temporary rental contract that may outweigh this tax relief.

In this other article, we provide an overview of rental profitability of temporary rental vs. permanent housing and why, in many cases, the latter can result in greater net benefits for the owner.

Information for property owners and real estate investors

With a strong economy, positive population growth and high rental demand, Madrid is one of the most attractive cities in Europe and offers many opportunities to invest in real estate.

Find out more about real estate investment in Madrid, important information about buying a house in Spain, rental types to improve profitability and strategies such as housing renovation to improve profitability.

We also provide information on Property Management services in Madrid and what a Property Manager can do for you.

More information on corporate rental

There are many useful online resources that cover the topic of corporate rental and the requirements for VAT exemption. Here are a some recommended links:

Idealista – Housing newsa
El Economista – Corporate rental: is it exempt from VAT?
Blog Jorge Cortés Abogados – rentals to companies

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