How Does VAT Work for Holiday Rentals?

We are currently experiencing a boom in the rental of so-called “holiday apartments”, caused by the increase in tourists and the tourist sector in general that Spain is suffering.

There are many doubts surrounding the taxation of this type of rental, so, in this post, with the help of our tax lawyers, we’re going to explain how it works, including subleasing, since more and more companies are appearing to rent out apartments then automatically start subleasing them to tourists.

Before discussing this, we’ll determine one difference: whether they provide hostelry services or not.

Remember that the terms explained below refer to the taxation of rental operations, which has nothing to do with the administrative registration of an apartment, whether it is a holiday apartment or not, because with regards to the Spanish VAT Law, State laws, which regulate these relations, must be adhered to, without taking into account any administrative obligation required by the different autonomous communities, at least, without taking them into account for tax purposes.

Hostelry services refers to cleaning, bedsheet changes, meals, breakfasts, dry cleaning, ironing, towel changes, reception and similar. Moreover, this bears in mind that these services are provided “during” the tenant’s stay and not only before or after. The detail of providing said services during their stay is crucial, since only carrying out these services at the beginning and end of the stay is not considered part of hostelry.   

Therefore, with this data we can establish the following possibilities:

The apartment’s owner sells or rents directly to the consumer.

This rental can be carried out in two ways:

• a) Without any service delivery: in which case the operation shall be exempt from VAT. In this case the owner does not issue an invoice, but rather a receipt excluding VAT to the final user, that is to say, they would not be obliged to issue an invoice. However, they would of course still have to declare the rental in their annual tax declaration.
• b) With the delivery of hostelry services: this operation is subject to VAT and the owner must issue an invoice including VAT at the current rate of 10%.

The owner rents their apartment to a third-party company (management or real estate company) and said company manages the property, directly invoicing the final user.

Here we would be faced with two different activities or actions, two legal relationships:

• a) The first would be the relationship between the owner and the management or real estate company: this operation is subject to 21% VAT and a 19% deduction (corresponding to Personal Income Tax), which the managing company must retain and pay to the Spanish Tax Agency on behalf of the owner (regardless of whether the owner is a natural or legal person), since, obviously, the rental relationship between these taxpayers is not for use as dwellings; the managing company cannot occupy the apartment (the apartments may only be occupied by natural persons), and it is unknown who the apartment will be rented to until customers are obtained.
• b) The second legal relationship is that between the management company and the final user, that is, with the tenant renting the apartment for one week, two days or one month. In this case, there are two cases with different VAT treatment:
  • If the management company DOES NOT provide hostelry services: in this case the operation shall be exempt from VAT, given that it shall be nothing more than a rental for use as a dwelling. Again, in this case the management company has no reason to issue an invoice, a receipt excluding VAT is enough, unless the customer requests an invoice (because it is compulsory to issue an invoice if the customer requests it) and, of course, the income must be recorded.
  • If the company DOES provide hostelry services: in this case the operation shall be subject to VAT (not exempt), so the management company shall be obliged to issue an invoice at all times, charging 10% VAT, since this is the percentage applicable to hostelry services.

As can be seen, in the first case (a), the following consequence arises: the management company receives an expenditure invoice including 21% VAT from the apartment’s owner, that is to say 21% VAT applies; and, on the other hand, they receive their income without VAT since they do not provide hostelry services, so, supposing that this is the only income, it would be included in what is known as a “VAT pro-rata” which, for our example, would directly mean that the VAT paid cannot be deducted from their expenses (0% pro-rata). In the event of being unable to deduct any VAT, it is recommended that the VAT is recorded as a major expense of purchases, so that this expense can be used for corporate tax purposes, which is perfectly legal, but in these cases it is not recommended that VAT be refunded. This is a very common error, and the only thing that can be obtained is a sanction from the Spanish Tax Agency for having requested a refund of a tax credit that does not apply.

For the second case (b), in which hostelry services ARE provided, the management company shall receive an invoice for the rental including 21% VAT and shall issue invoices for their services including 10% VAT, in such a way that they can deduct all VAT charged. However, be careful, it could also suffer imbalances in its treasury, since it bears more VAT than it charges, at least percentage-wise, so this growing activity requires a high control of finances, specifically of cash, because, although in this situation it is possible to request the refund of the VAT input, it is important to note that, unless the company is in the Monthly VAT Refund Registry (REDEME) or is a large company, it will have to wait until January to request its corresponding VAT refund. Therefore, the company could face some of the liquidity problems mentioned until it receives said tax refund.

The owner hands over the property to the final user, but they do so through an intermediary or commissioner (agency or real estate agent) who charges the owner for their management or involvement.

As you can see, this legal relationship is different from the aforementioned relationships and can occur in many cases, since it depends on the agreement that the Management company makes with each apartment owner.

The owner issues the final invoice or receipt to the final user, meaning that it is the owner who has the direct legal relationship with the tourist (tenant), therefore the complaints and claims shall revolve around the owner. Knowing this, there are two options:

• a) That they do not provide hostelry services, which would be normal since it is not common for the owner to provide such services: so, we would be faced with an operation exempt from VAT since it is a rental for use as a dwelling, regardless of whether this is for one day or eight months, that is to say, the duration of the rental does not affect the tax to be paid, but rather the delivery (or not) of hostelry services.
• b) That they do provide hostelry services: this operation would be subject to 10% VAT with the obligation of issuing an invoice again, since providing the aforementioned services is the key that defines the VAT rate.

In either of the two cases, whether they provide hostelry services or not, a second legal relationship is generated, the one that arises between the intermediary or management company when looking for the tenant, and the owner of the property, since the management company has to charge for its intermediation services. These intermediation services, or real estate commission, generate the obligation for the management company to issue an invoice, being its customer the owner of the property, thus charging the VAT for its services, in this case, at the rate of 21%, since they are real estate intermediation or commission services for having obtained the tenant.

In this last case, the owner may only deduct the VAT charged in the management company’s invoice if they provide hostelry services (charging the tenant 10%), since otherwise (if they do not provide said services) they will not be able to deduct the VAT that they pay when they are in a pro-rata of 0%, as they will not have passed on any VAT to the tenant.

If you have any queries, we recommend that you contact our professionals, lawyers and economists at Ruiz Ballesteros who are experts in tax law.