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Three recent Decisions by the Central Economic-Administrative Court (TEAC) have come to unify the criteria regarding the income tax and the VAT on houses leased to companies to be transferred to their employees.
The criteria applied by the Tax Administration - and stated in various Tax Consultations to the Directorate-General for Taxation (DGT) –refused the application of the 60% reduction to the Income Tax as well as the VAT exemption for the rent of a property when leased to a company, even when the company transferred it to their employees as part of their remuneration.
Well, if the Decision 5138/2013 of September 9, 2016 by the Economic-Administrative Court stated, by unifying legal principles underlying case-law, considered applicable the reduction of 60% of the net income obtained through the lease in the Tax Income in the abovementioned cases; through two new Decisions (3856/2013 and 3857/2013, both dated December 15, 2016) this Court has also considered as applicable the VAT exemption in these leases to companies, provided that a series of requirements are met in all cases.
Next, a brief review of the criteria presented by the TEAC in relation to both taxes.
Taxation regarding the Income Tax.
In its Decision 5138/2013 (unification of case-law), the TEAC stated that "provided that in each specific case it has been duly proven that it is the lease of a real property intended for housing as a permanent residence or dwelling place of a natural person, the legal requirement necessary to apply the intended reduction (a reduction that entails taxing only 60% of the income obtained through the lease) shall be considered as met, without requiring that the dwelling is occupied by the lessee (legal entity) or that the tax benefit is excluded in the case of lessees who are legal entities."
Therefore, in these cases, the Court considers that although the lessee is not a natural person, the 60% reduction provided for in article 23.2 of the Income Tax Law should also apply:
- first, on the basis of a literal interpretation of the rule, since it only requires that the property is intended for housing and does not make any reference to the fact that the lessee should be a natural person or not.
- but also because the Court understands that a final interpretation must also lead to the same result, that is, the Court considers that the fact that the lessee is a company offers greater security and confidence to the lessor, which encourages the leasing of houses which was the actual purpose of the rule analyzed.
Taxation regarding the VAT.
As it is well known, Article 20.1.23 of the VAT Law establishes as an exempt transaction the lease of buildings or parts thereof exclusively intended for housing. The Directorate-General for Taxation (DGT) had been reluctant to apply this exemption in cases where the lessee was a company even if it transferred it later to its employees. We must remember, for example, the Binding Consultation V0061/2016 in which the DGT stated that, in addition to the fact that the building was actually used for housing, it was necessary that such use was made directly by the lessee, excluding therefore the possibility of a subsequent transfer to an employee The DGT considered such transfer as an assignment made in the exercise of the business activity of the company that prevented therefore the application of VAT exemption.
However, in its Decisions 3856/2013 and 3857/2013 (repeated criterion), both of December 15, 2016, the TEAC amends this administrative criterion and, in a finalist interpretation of the law, opens the door to the application of the Exemption when the lessee is a company that transfers the property to an employee for him/her to use it as a dwelling provided that some strict requirements are met:
- The lease must meet the requirements established for the purposes of exemption by the jurisprudence of the Court of Justice of the European Union (CJEU): that the owner has given the lessee the right to occupy the dwelling and to exclude other persons from it and that the assignment is in exchange for a rent and for an agreed period of time.
- Obviously, the lease agreement must state that the lease is made for the exclusive use of the property as a dwelling, excluding the possibility of carrying out in the same a business or professional activity.
- The agreement must specifically state the person or persons that will be the final user of the property, preventing the sublease or subsequent assignment of the dwelling during the period of validity of the lease. As it happens in the case analyzed by the TEAC, it will not be enough to include in the lease agreement a general clause according to which the company (that is, the lessee) may designate after the signing of the agreement the natural person who will make use of the property as housing. This subsequent designation of the occupant of the dwelling will entail an assignment or sublease that would exclude the possibility of applying the exemption from VAT.
It is therefore clear that the specific content of the lease agreement can lead to the application or exclusion of the exemption, so special attention should be paid to the accuracy when drafting the said agreement.
In summary, both, for the application of the 60% reduction regarding the Income Tax and for the application of the VAT exemption, the TEAC has considered that the lease of a property to a company for its subsequent assignment as a dwelling to an employee, should be considered exactly the same as if it was entered into with an individual. For this purpose, the use of this property as housing by the employee must be duly proved, and (for the purpose of applying the VAT exemption) the employee in question must be identified in the lease and not at a later time.
Finally, it should be remembered that the Decisions of the TEAC analyzed herein have been pronounced in unification of case-law (Decision 5138/2013) or with indication of repeated criterion (Decisions 3856/2013 and 3857/2013). Therefore, pursuant to the provisions of Article 239.8 of the General Tax Law, these Decisions of the TEAC are binding for the regional economic-administrative courts, their regional counterparts, and the rest of the State and Regional Tax Administration.