Partnerships may contribute their rental activity to a company without incurring tax

The integration of a real estate rental business line into a commercial company is an operation that allows for tax neutrality, provided that strict economic use requirements are met. The Directorate General of Taxes (DGT) has specified the necessary conditions so that this movement does not result in an immediate tax impact for the contributor.

What the DGT has ruled

For the contribution of a real estate rental business line to qualify for the tax neutrality regime provided for in the Corporate Income Tax Law (LIS), the following elements must concur:

• Residency and participation: The entity receiving the activity must be a resident in Spanish territory, and the contributor must maintain a minimum shareholding of 5% in the share capital.
• Economic use: The properties must form part of an economic activity with its own commercial accounting. In the case of partnerships (comunidades de bienes), each must separately meet the requirement of employing at least one person under a full-time employment contract.
• Temporality: The properties must have been used for the economic activity for a minimum period of three years prior to the date of the contribution.

Regarding indirect taxes, the operation will not be subject to VAT if an autonomous economic unit is transferred. Likewise, the transfer will be exempt from Transfer Tax (ITP) and Stamp Duty (AJD) as it constitutes a restructuring operation.

What this means for you

If you are the owner of a real estate rental activity or are part of a partnership, this ruling allows you to transfer said activity to a company without the operation being considered income for Personal Income Tax (IRPF), provided that the LIS requirements are met. It is fundamental that the rental activity is not merely patrimonial, but rather constitutes a real economic activity with a labor and accounting structure.

What should be done

Before proceeding with the contribution, it is necessary to verify that the rental activity complies with the requirements of the IRPF Law to be considered an economic activity. It must be checked that each partnership has full-time staff hired and that the properties have maintained such use during the last three years. Given the complexity of the LIS and VAT (LIVA) requirements, it is necessary to assess each case individually to ensure compliance with the regulations.