Exemptions for family businesses: I have a company that leases real estate, what are the consequences for wealth tax?
As we mentioned in a previous post, the value of the shares held must be declared in the Wealth Tax (IP). As a reminder, in that article we also commented on the so-called “family business exemption”, which is established in article 4-Eight-Two of Law 19/1991, of 6 June (LIP). In this new article, we analyse the Wealth Tax exemption for property leasing companies.
Briefly (although for more information on this issue you can consult the link above), the conditions that must be met for the value of a company’s holdings or shares to be exempt are as follows:
- That the entity in which it participates does not have the status of an asset-holding company.
- Questions relating to the percentage shareholding in the company (5% individual or 20% jointly with the kinship group).
- Exercise of management functions and remuneration of more than 50% of the total income obtained.
Well, in this article we are going to comment on some of the specialities that exist in the regulations for commercial companies that are dedicated to the leasing of real estate.
Specifically, we are going to talk about the keys that must be taken into account in order to comply with the IP exemption for those companies that engage in this real estate activity.
What do I have to take into account in order to benefit from the family business exemptions if I have a property leasing company in my corporate scheme?
As we have already mentioned, the first of the requirements of the PI regulations is that the investee must carry out an economic activity and cannot have as its main activity the management of movable or immovable assets.
The regulations themselves indicate that, in order to determine the existence of an economic activity, we must refer to the rules governing Personal Income Tax (IRPF).
In relation to property rental activity, Article 27.2 of Law 35/2006 of 28 November (LIRPF) establishes that this activity will be considered as a business (economic) activity if at least one person with a full-time employment contract is employed to carry it out.
Otherwise, i.e. if this person is not employed, the activity will not be considered economic and its income will be classified as income from real estate capital.
For this reason, in order for the leasing company not to be engaged in the management of real estate, it must have this person employed on a full-time contract of employment.
If the same person is in charge of both the management and the management of the leases, can I benefit from the family business exemptions?
This issue has always been the subject of debate and controversy with the tax administration.
Its verification and inspection bodies have always considered that the functions of management and management of leases could not be carried out by the same person, although this requirement is not expressly established in the regulations.
However, in March 2024, the Central Economic-Administrative Court (TEAC) concluded that the same person exercising the management functions may, in turn, be the full-time employee required by the above-mentioned regulations.
In this sense, it reiterates the criterion that this body had already maintained in its resolution of 19 September 2015 and, therefore, creates a doctrine that is binding for all the bodies of the Tax Agency, and which must be followed by those bodies assigned to the verification and inspection of taxpayers.
That said, although this criterion introduces a certain degree of flexibility as it does not require this exclusivity, we would also like to point out that, although this duality of tasks is permitted in the same person, it is still a necessary and essential requirement that the person carrying out these tasks must be covered by the general Social Security scheme.
Is having a full-time employee with a contract of employment sufficient to qualify for the family business exemptions?
Traditionally, the Tax Agency has maintained that this condition is necessary but not sufficient to qualify for family business benefits.
In his opinion, even if this employee is formally available, the taxpayer must also prove the existence of a minimum administrative workload that justifies the need to hire this employee.
This issue has always been a source of conflict and discussion before the tax enforcement bodies, as this “necessity” is not defined by law and, consequently, there is a great deal of legal uncertainty in this respect.
Proof of this is the multitude of case law on this issue, both at the level of the High Courts of Justice of the autonomous communities and the National High Court.
Jurisprudence on eligibility for family business exemptions
In this regard, we would like to point out that in the 2022 financial year, the latter body concluded that the mere fact that a worker is under-utilised in the activity of renting out real estate cannot determine the non-existence of a sufficient workload or how unnecessary the hiring of a worker may seem (SAN 831/2022, Appeal no. 603/2019).
In addition, very recently, the Supreme Court has admitted two appeals in cassation (ATS 2948/2024, of 13 March and ATS 4432/2024, of 10 April) to analyse the following two questions:
- Firstly, whether it is sufficient to prove compliance with the requirements set out in Article 27.2 of the Personal Income Tax Act or whether the hiring of the employee on a full-time employment contract must be justified from an economic point of view (ATS 4432/2024).
- Secondly, if the employee with a full-time employment contract can be one of the entity’s own partners or participants in order to avoid having to hire outsiders.
As we can see, analysing compliance with the existing requirements for accessing family business exemptions is not a simple task, especially when we have within our corporate structure companies that are dedicated to the leasing of real estate.
For this reason, examining these issues requires a detailed study of the taxpayer’s corporate structure in order to verify compliance with these requirements, as it is not possible to generalise in this area.
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