Companies with mostly non-business assets will be classified as investment entities

The legal and tax nature of a company can change drastically depending on its balance sheet composition. The Directorate General of Taxes (DGT) has specified the criteria to determine whether a company should be considered an investment entity, a decisive factor for its treatment under Corporate Income Tax (Impuesto sobre Sociedades).

What the DGT has ruled

The advisory body establishes that a company acquires the status of an investment entity when, according to the average of its quarterly balance sheets, more than half of its assets are composed of securities or elements that are not used for an economic activity.

To avoid this classification, the entity must demonstrate that the securities it holds are intended for the management of holdings and that it has an organization of material and personal resources dedicated specifically to their management. In the case of real estate management, the DGT points out that the activity is considered economic if at least one worker with a full-time employment contract is employed. However, subcontracting the management of real estate could allow for the maintenance of the economic activity status in specific cases.

What this means for you

If your company primarily manages real estate assets or securities portfolios, your asset composition is critical. It is not enough to simply own the assets; the key lies in their use for a real and organized economic activity. If the average of your quarterly balance sheets shows that more than 50% of your assets do not meet these requirements of use or management, the company will be classified as an investment entity in accordance with Article 5.2 of the Corporate Income Tax Law (Ley del Impuesto sobre Sociedades).

What you should do

It is necessary to perform rigorous monitoring of asset composition using the average of quarterly balance sheets. For companies managing real estate, it is essential to evaluate whether the personnel structure or the subcontracting of management meets the required standards of economic use. Likewise, in the case of securities portfolios, it is fundamental to prove the existence of an organization of material and personal resources destined for the management of said holdings to avoid classification as an investment entity.