VALUE ADDED TAX AND PERSONAL INCOME TAX (IRPF) ON HOLIDAY HOMES

The proliferation of Internet portals for the rental of holiday homes has meant a new type of business where more and more homeowners are attracted to the Spanish coasts, causing great discomfort in the hotel sector, which has not hesitated to cross out this activity as unfair competition.  Due to pressure from the hotel sector, in 2013 the Spanish Government decided to exclude these accommodations from the Urban Leasehold Act (LAU) and to entrust the matter to the Autonomous Communities, which has generated a great variety of very different laws depending on the autonomous community in which the house is located. However, there is a coincidence in all cases: The owners must pay in Spain the revenue obtained by these tourist rentals.

The Spanish Tax Agency started to monitor the correct inclusion in the annual tax returns of the revenue generated by private rent for short stays of beach/mountain apartments, flats, cottages, etc. To locate part of these leases, the Tax Agency is using computer tools and crossing data with existing Tourist Housing Registries in the autonomous communities, as well as with tourist rental platforms such as Airbnb or Homeaway.

In case that the Spanish Tax Agency understands that a house is being rented, it shall have the right to pay a visit. If the Tax Agency finds out that the owner is not declaring the revenue from the said rental, it may impose a fine of no less than 50% on the non-declared amount plus the interests on arrears.

When renting holiday homes, the owner must take into account two taxes: VAT and Personal Income Tax (IRPF).

VALUE ADDED TAX ON HOME HOLIDAYS

As VAT is concerned, Article 20.1 of the Value Added Tax Law 37/1992 states that certain transactions are exempt from it. In particular, section 23 of the said Article 20.1 stipulates that no VAT shall be charged on transactions related to housing renting and assignment of lease.

However, Part E of the said Article states that VAT exemption shall not be applied on furnished properties where the lessor undertakes the provision of the same complementary services provided by the hotel sector, such as:

  • Cleaning
  • Change of sheets
  • Catering
  • Change of towels

The scope of the law does not cover cleaning and change of sheets and towels services before and after the assignment of lease. According to Article 20.1, these services must be provided during the said assignment, not only before and after it.

Therefore, the aforementioned services shall be deemed as economic activity and VAT shall be charged on them accordingly. For the owner of the property, the consequences of charging VAT are, among others, the following obligations:

  • To incorporate a company, if required, or to register as self-employed.
  • To issue invoices including VAT.
  • To keep accounting ledgers.
  • To submit the VAT return every three months (form 303), as well as the Annual Tax Return on Operations with Third Parties (Form 347), the Annual Summary of VAT Quarterly Returns (Form 390) or the Tax Return on Intra-community Transactions (Form 349).
  • To declare this revenue separately in the Personal Income Tax.

At present, the VAT on holiday rentals transactions is 10%; however, there are different situations to be taken into account depending on the people involved in the assignment of lease:

a) The owner leases the property directly to a third party: If the owner provides complementary services typical of the hotel sector, then he/she shall issue an invoice with 10% VAT included. In case that the said services are otherwise different from those typical of the hotel sector, then the lease shall be deemed exempt from VAT.

b) The owner assigns his/her holiday home to a managing company that shall be in charge of managing the lease. The owner shall issue an invoice including 21% VAT to the said managing company, which at the same time shall issue an invoice to the user including 10% VAT in case that services typical of the hotel sector are provided. If the aforementioned services are not provided, then the lease is exempted from VAT.

c) The owner assigns the property to the final user but a real estate agent, broker or commission agent that is not a managing company gets involved in the transaction: This case is a combination of cases A and B, i.e. the transaction takes place between the owner and the final user but an agent that is not a «managing company» gets involved.The owner shall issue to the final user an invoice including 10% VAT if he/she provides services typical of the hotel sector. At the same time, the real estate agent, broker or commission agent shall issue an invoice to the owner including 21% VAT for their services.  As it happens with the two previous cases, if the owner does not provide services typical of the hotel sector, VAT shall be exempted.

Personal Income Tax on properties with a tourist or holiday purpose

The revenue obtained from the assignment of lease of tourist or holiday homes shall be treated differently depending on whether the owner has a person employed on a full-time basis to perform this economic activity, or whether he/she provides final users with services typical of the hotel sector under the aforementioned terms.

If there is a person employed on a full-time basis and services typical of the hotel sector are provided, then the revenue obtained from this activity shall be deemed as earnings from economic activities, with the corresponding tax obligations it entails. Otherwise, the said revenue shall be deemed as income from real estate assets. 

Considering the most probable assumption, which is the lease of housing without services typical of the hotel sector nor employees, owners shall include their revenue in their Income Tax as income from real estate assets, whether they are residents or non-residents. Whatever the case, the fiscal year shall have two clearly different periods:

a) The period during which the property is leased. During this period, the owner shall declare his/her full revenue and the necessary expenses to lease the property shall be deducted in proportion to the number of days it is leased. This means that the owner’s earnings will have to be included as income from real estate assets in his/her Income Tax. The taxable income shall be the net assets resulting from subtracting the necessary expenses from the revenue. Initially, the following shall be deducted as expenses:

  • Property tax (IBI)
  • Interests (in case of mortgage)
  • Garbage fee
  • Community fees
  • Intermediary agency
  • Supplies
  • Insurances
  • Repayment
  • Etc.

All these expenses will be charged in proportion to the time the property has been leased, except for the expenses of the mediating agency, which will be deducted in full. The expenses arising from the advice and preparation of the lease agreement will also be deductible in full.

In case that expenses exceed income, then the owner shall be able to deduct the difference throughout the next four years.

b) The period during which the property is free and at the owner’s disposal. In this case, earnings shall be declared as imputed income, according to the Spanish Tax Agency rules. This means that 1.1% shall be applied on the cadastral value of the property, which will be later divided by 365 and finally multiplied by the number of days the property has been unoccupied. If the cadastral values were reviewed prior to 1996, then 2% shall be applied.

In view of the complexity of the subject and given the importance of declaring your taxes correctly to avoid penalties, if you have a property in Spain —whether you lease it or you use it to enjoy with your family— and more important, if you get a rent for leasing that property, we strongly recommend you to ask for advice to the members of our Tax and Accounting Department team. Imont Legal Services has a team of tax consultants that represents non-residents clients, providing them with the necessary advice and support to ensure the fulfilment of their tax obligations in Spain.