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Spain: Participation exemption for real estate rental entities


Background: one-employee rule

According to the Spanish Corporate Income Tax Act, an entity that carries out real estate rental activities must have at least one employee with a full-time labour contract to be deemed an entity performing a 'business activity' (i.e. its income is substantially derived from activities other than passive investment).

In addition, Spanish companies are entitled to a participation exemption on capital gains arising from the disposal of qualifying entities. To benefit from this regime, a company must have a holding for at least one year and a 5% stake in the capital (or an acquisition value over €20 million ($24 million)) in a subsidiary which performs a business activity.

Since 2015 when the new regime entered into force, certain court and administrative pronouncements have reviewed the fulfilment of the business activity requirement for entities holding rental-generating real estate ('prop-cos') and have delimited the so-called 'one-employee rule', particularly in cases of participation exemptions on the disposal of prop-co shares.

Sufficient condition?

In a case where it was examined if having one single employee was a sufficient condition for a prop-co to be deemed a business activity entity, the Spanish Supreme Court (judgment of December 7 2016) concluded restrictively. For the court, the relevant question was whether there was a 'minimum charge of work' as regards the intensity of the activity of the employee in relation to the management of the real estate asset.

Necessary condition?

On the contrary, according to several tax rulings issued by the Spanish Directorate General for Taxes, there are situations in which, based on economic reasons, an entity could manage real estate assets without having employees, by subcontracting material and human resources with a non-related professional rental manager. Consequently, contracting an employee would not be a necessary condition either. Please note that as the latter is an extensive interpretation which moves away from the literality of the Corporate Income Tax Act, future tax rulings – including decisions from the Central Economic-Administrative Tribunal – could amend the criteria and conclude more restrictively.

In these cases, where the prop-cos referred to had no employees and held properties in shopping malls, hotels or offices, some indicators of the activity of the real estate manager (such as the number of leased properties and tenants or the volume of income of the outsourcing contract) were compared to those which would correspond to a full-time employee. And when according to that evidence the substance of the rental activity was relevant, the Directorate General for Taxes concluded that the prop-co had performed a business activity and thus, the participation exemption would apply in the case of a transfer of that prop-co's shares.

What´s next?

Despite these permissive outsourcing criteria, the minimum charge of work concept does not provide full tax certainty to all investment structures in real estate implemented through prop-cos, as the absence of a safe harbour rule may permit tax authorities to reassess the situation according to the facts involved in each particular case.

In addition, there is a precedent (tax ruling V2909-16) in which the Directorate General for Taxes stated that a principal purpose test – anticipating some BEPS provisions – should be done in order to determine whether the principal aim of a prop-co structure was to indirectly avoid taxation on the disposal of real estate.

While new pronouncements do not clarify the situation, real estate structures through prop-cos in Spain, including those held by non-resident investors, should focus on strengthening their economic substance, in accordance with new post-BEPS taxation paradigms.


Javier Calatayud


Javier Calatayud Apellániz (

Garrigues Valencia – Taxand Spain


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