Renting out properties in Spain is getting more complicated every day, especially holiday rentals. This is a trend that started several years ago due to complaints from the hotel sector. This is because the hotel sector has to comply with all kinds of strict requirements, for example regulation of sanitary aspects, collective labour agreement and other working conditions, remittances of premiums, aspects of fire safety, consumer legislation, duty to report renters to the police, remittance of tourist tax and so on. The hotel sector, like other businesses, has to comply with hundreds of regulations nowadays.
Private individuals who occasionally rented out their own homes for holiday guests escaped these regulations. As a result, prices were much lower than hotel stays. With the emergence of portals that made private-to-private rentals increasingly easy, that market has boomed. The hotel industry paid the price and wanted to put an end to this.
This has led to these days the government regulating more and more In the rental market. Small private landlords are being treated the same as professional companies in those regulations and are expected to comply with the same rules.
With the above in mind, I will take you through some key points regarding renting out properties in Spain and what to be aware of. These main points are: Rental tax, Rental administrative requirements and Other points of interest.
1 Tax treatment Rentals
Legislation makes a distinction between long-term and short-term rentals, either rentals for permanent residence or for holidays. There is currently no legal rule defining when rentals fall under one category or the other, but we assume that holiday rentals are limited to stays of up to 4 weeks. All rentals that exceed this period are considered long-term rentals, even though that type of rental is not always intended for permanent residence. Think of over-wintering, for example.
It is very important to keep this distinction in mind. This is because there are different legal and tax implications between one category and the other.
1.1 Taxation
Within the aspect of taxation, there are a number of sub-categories, namely VAT, income tax, deduction of expenses and tourist tax. The starting point is that in most tax treaties, it is agreed that the country where the property is located is authorised to levy the taxes.
1.1.1 VAT
Renting houses in Spain is in principle VAT-free. So no VAT has to be levied on the rent. The other side of that medal is that VAT paid cannot be settled, but this is not necessarily unfavourable. However, VAT can be opted for if hotel services are provided. An answer to the question, whether opting for VAT application is more advantageous or not, will have to be found in a complex calculation and estimation, which is difficult to make in advance.
1.1.2 Rental and the intermediary
It happens that an owner makes the property available to an organisation which then seeks renters. The owner-renter relationship can take many forms that determine the levying of taxes and possible liability.
- Intermediary is a third party: If the tenant-landlord relationship is established directly between the owner and the end user, nothing changes for the owner in a tax or legal sense. The intermediary receives a fee paid directly by the owner. This fee, known as ‘commission’ is subject to 21% VAT as the intermediary provides a service to the owner, namely finding tenants.
- Intermediary may sub-rent: It also happens that the intermediary rents the property with the aim of re-renting it to the end user. The owner then receives compensation for the use of the property directly from the intermediary, who in turn receives compensation from the end user. The intermediary is liable towards the end user for providing the rental enjoyment and additional services. The application of VAT in this situation is a disputed issue.
- Arguments for applying VAT are based entirely on a 2017 ‘binding opinion’ of the tax authorities. This states without question that the intermediary provides a VAT-related service and, for that reason, VAT is due between all parties in that relationship;
- Arguments against VAT application follow the law. This law states that rental is not a VAT-related activity unless hotel services are provided. The basis for charging VAT is not determined by the parties to the agreement, but by the type of transaction being carried out.
1.1.3 Income tax Spain
Long-term rentals have a tax advantage. This is because the Spanish government tries to encourage long-term rentals and gives a discount of up to 60% (contracts before 1 June 2023) or 50% (contracts from 1 June 2023 onwards) on the taxable sum to individuals who make their property available for permanent residence. This discount is applied to taxable income. There is no such benefit for income from holiday rentals.
If the renting is done through an intermediary who is allowed to sub-rent, we enter unknown territory in tax terms. In the relationship owner – intermediary there is a long-term rental, but above we saw that the tax authorities can take the view that this relationship is determined by the activities of the intermediary. If the latter exploits the property through rentals, regardless of whether it is holiday rentals or permanent rentals, the tax authorities consider that VAT should be charged, but there are also good arguments for considering this relationship between owner and intermediary as a long-term rental. The activity of the intermediary will always be residential rental. The destination of the property cannot be changed. It cannot become an office or a shop. Whether under these circumstances an owner can use the 60%/50% discount arrangement with the consent of the tax authorities is something that is uncertain.
1.1.4 Home country income tax
Under most double taxation treaties, the right to levy on income from property is assigned to the country where the property is located. This is also the case of the tax treaty between Spain and the Netherlands. The tax treaty says it applies to ‘persons’, without distinguishing between natural or legal persons, but we assume that legal persons can also appeal to the treaty.
The system of taxation is sometimes referred to as ‘progressive taxation’. The usual methodology is that the foreign income component is first fully included in the Dutch tax base, after which a reduction to avoid double taxation is granted pursuant to the exemption method or the credit method, as the case may be. In some countries, this means that the scale is increased and therefore a form of double taxation still occurs via a backdoor.
How the Dutch tax authorities deal with this is something that needs to be discussed with your Dutch accountant.
1.1.5 Deduction of costs
The deduction of costs is the same for holiday rentals as for permanent rentals.
In the case of holiday rentals, according to the official position of the Spanish tax authorities, the general costs should be spread pro rata over the year and are deductible only for the weeks in which rental income is actually generated. If the property is not rented out for the whole year (which is the rule for holiday rentals), these general costs are therefore not 100% deductible. Think, for example, of paid property tax, building insurance, standing charges, owner’s association contributions, or other regular recurring costs. It is frustrating that these costs are not 100% deductible. After all, the property is available for rental all year round. Just because it is not rented out on some days does not mean those costs do not have to be made. We are currently awaiting a standpoint from the Spanish Supreme Court on this issue.
Only costs specifically related to a specific rental period can be fully deducted. Think for example of cleaning costs, a repair or commission to an intermediary.
1.1.6 Tourist tax
The liability to collect and pay tourist tax is an obligation imposed only on landlords entering the field of holiday rentals. Currently, the tourist tax is only applied in the states of Catalunya and the Balearic Islands. There, it is a responsibility of the municipality to collect this tax.
To be continued.
Roeland B.C. van Passel