· Holding Company:
Article 5 of the Corporate Income Tax Law defines a holding company as a company in which more than half of its assets are composed of securities or of other assets not related to an economic activity. Moreover, the Law clarifies that, in the event of property leasing, it will be understood that an economic activity exists only when at least one person employed on a full-time basis is used for its execution.
Employing the person must be justified and not fictitious. The tax authorities will understand that the employment of said person is fictitious and, therefore, does not qualify as the existence of economic activity if the company’s assets are only composed of one or two properties. This is the case in the majority of these kinds of companies, which have been incorporated to contribute or acquire one or two properties that are being used by the companies’ own shareholders.
Article 18 of the Corporate Income Tax Law establishes that operations carried out by related persons or entities shall be valued at market price, that is, for a price which would have been agreed between independent persons or entities under conditions respecting the principle of free competition.
The aforementioned Article 18 establishes that an entity and its shareholders or participants, among others, will be considered as related persons or entities.
In the case in question, assuming a company owns a single property, and this is used by the company’s own shareholders, or is available to them even if they don’t use it all year round, a lease contract must be formalised between the parties and a price for the lease must be established, which must be the market price.
· Tax Problems for these Holding Companies:
Therefore, among other things, in order to comply with their tax obligations, these holding companies must declare the agreed lease amount as income, at market price, with the right, of course, to deduct the expenses of the community of owners, property tax, rubbish collection fee, home insurance, depreciation, and any other expense necessary to obtain the income.
However, in many cases, considering that they were merely asset-holding companies, and that they did not obtain any income, these holding companies have not declared this income to the Tax Office and, for some years now, the latter has been carrying out inspections and issuing inspection reports that represent a very significant economic loss for those concerned.
The tax inspection, when the holding company has not declared rental income, is considering a market value price of the rental of X euros per square metre per month, and that once the tax-deductible expenses have been subtracted, profit must always be declared and corporation income tax must be paid on this profit. This does not make sense if the company has sufficient expenses or accumulated losses, but this is what the inspection is doing in practice.
Moreover, in many cases, they apply what is called a “secondary adjustment” stipulated in Article 18.11 of the Corporate Income Tax Law, which consists of considering the lease amount at market price as a dividend for the shareholder, which the latter has not paid.
Moreover, the tax inspection ends up opening a penalty file for not having paid the tax debt on the due date. And, applying the “Secondary Adjustment”, it may also issue a decision for personal income tax, to be paid by the shareholders, with interest for late payment, and a new penalty file for personal income tax for failure to pay the corresponding percentage for personal income tax.
If the company that owns the property is not a Spanish resident, the tax treatment may be even more serious, if it is resident in a tax haven, or a country without an agreement with Spain, since in addition to the Non-Resident Tax, it must pay the “Special Tax” annually, consisting of 3% of the cadastral value.
· Does having a holding company provide any tax advantages?
In our opinion, incorporating a holding company with the contribution or acquisition of a property for personal use does not constitute a tax advantage in view of the above, or at least cannot be considered as fraud.
If the property is owned in your own name and not through a holding company, the tax cost is lower or zero, because if it is a permanent home, you do not have to declare any income on income tax, but we would have to calculate the possible “capital gains tax“, which is only paid if the capital gain exceeds 700,000 euros. Therefore, if it is a home owned by a married couple at 50%, then we could go up to 1.4 million euros and not pay any capital gains tax.
If the property is a “second available home”, that is, a holiday property or assigned to a family member, the only income to be declared is the so-called “Income Tax“, that is, 1.1% or 2% of the cadastral value of the property, both for resident and non-resident individuals in Spain.
· Should I keep or dissolve my holding company?
If you are a shareholder in a holding company, you must make the appropriate calculations to decide whether to maintain the holding company or to dissolve it and take ownership of the property. In this respect, just remember that in the event of the dissolution of the company with the distribution of the liquidation share to the shareholders in the form of allocation of the real estate, several taxable transactions will occur:
- With regards to Corporate Income Tax, a capital gain or loss occurs for the company for the difference between the property’s market price and the net book value of the property allocated to the shareholder.
- With regards to Personal Income Tax for the shareholder who receives the property, a capital gain or loss occurs for the difference between the market price of the property received and the cost of their shareholding in the entity’s share capital.
- With regards to Urban Land Appreciation Tax, the so-called “Municipal Capital Gain”, when there is an alteration in the cadastral ownership, which is the responsibility of the holding company.
- With regards to Tax on Property Transfer and Documented Legal Acts, the modality of corporate transactions is payable at 1% of the value handed over to the shareholders, who are the taxpayers and are obliged to pay this percentage.