Companies outsourcing property management may be considered to carry out economic activity

The classification of a company as either a patrimonial entity or as a performer of economic activity determines its tax treatment under Corporate Income Tax (IS). Traditionally, the administration has required a minimum staff structure to validate the existence of real economic activity in the real estate sector.

What the DGT has ruled

The Dirección General de Tributos (DGT) has analyzed whether an entity that outsources the professional management of its real estate leases carries out an economic activity pursuant to Article 5.1 of Law 27/2014 on Corporate Income Tax (LIS). The criterion establishes that, although regulations usually require the presence of at least one employee with an employment contract and full-time hours, this requirement can be made more flexible.

The resolution indicates that when the size and volume of income of the company make the outsourcing of professional management more efficient than the direct hiring of personnel, the requirements of the LIS will be understood to be met. However, the administration emphasizes that this circumstance must be substantiated through evidence demonstrating the economic reality of the entity.

What this means for you

This criterion has a direct impact on companies managing real estate portfolios. If your business model is based on the outsourcing of administration and management services, you are no longer necessarily obliged to maintain your own staff to avoid being classified as patrimonial entities.

The key lies in operational efficiency. If the company's structure justifies that outsourcing is the most appropriate method for its business volume, external management will be valid to prove the performance of an economic activity.

What should be done

For this interpretation to be applicable, the company must have documentation that supports the need for outsourcing. It is essential to:

• Document the economic justification of why external management is more efficient than hiring own personnel.
• Maintain professional management contracts that demonstrate a real and continuous activity.
• Ensure that the cost structure and the organization of the entity reflect an effective economic activity and not merely a passive holding of assets.

Each situation presents particularities that must be analyzed to ensure compliance with current regulations.