Residential leases with or without VAT and their consequences

01.2014

One of our clients, together with his wife, acquired a property which, after renovation, they intend to let as a dwelling. One possible arrangement is to lease it to a company for use as accommodation by one of its employees. In that case, the company would be the tenant and sign the lease agreement. The prudent and least contentious option is to issue invoices including VAT, although there is some case law (mainly from regional courts) supporting the view that where the property is used as a residence by an identified individual, and that person’s name appears in the lease contract, the rent should be invoiced without VAT.

The advantage of issuing invoices with VAT is that the input VAT incurred on the renovation works would then be deductible, provided that the leasing activity continues for a number of years. The drawback, however, is that the landlord would not benefit from the 60% reduction on rental income derived from the leasing of residential property (Article 23.2 of the Spanish Personal Income Tax Act).

Additionally, where a property is jointly owned, it is essential that invoices are issued in the name of the comunidad de bienes (joint ownership entity) using its own tax identification number (NIF), and not separately in the name of each co-owner. This requirement was confirmed in a ruling by the Spanish tax authorities dated 13 September 2013. Consequently, the owners must formally register the partnership with the tax authorities, thereby obtaining a separate NIF. The rental income will subsequently be attributed to each partner in their individual income tax return. As can be seen, whether a property is leased with or without VAT has significant implications for its overall tax treatment.

++ Published at the tax newsletter of the German Chamber of Commerce in Spain related to VAT news ++