The Spanish tax authorities confirm that the requirement of having one full-time employee so that a leasing entity does not qualify as a passive asset-holding company can be replaced through outsourced resources
In a very recent tax ruling, the Spanish Directorate of Taxes (the "Tax Authorities") has confirmed that a leasing entity that meets the full time employee requirement by outsourcing to a third party professionalized management entity, meets the requirements of the law to be considered as carrying out a business activity and, therefore, it is not a passive asset-holding company for the purposes, among others, of being able to apply the participation exemption on the gain to be obtained on the sale of its shares.
The Tax Authorities take up again the doctrine that it had repeated many times in the past, but had not reiterated for several years, according to which the economic reality shows business situations in which entities with relevant real estate assets for whose management at least one employee would be required, may opt to hire third party companies specialized in real estate management.
The case raised in the tax ruling, is based on very specific circumstances such as: (i) the fact that the leasing entity belongs to an international real estate group with a portfolio of more than 720 million euros; (ii) that the outsourcing model with professional entities is applied globally by the group; (iii) that the real estate assets of the leasing entity are large and complex in nature (offices and movie sets leased to third parties that require individualized management); and (iv) that the number of tenants, as well as the volume of business and the volume of income is high. These circumstances are taken into account by the Tax Authorities to conclude that “all this requires specialized and professionalized management, given the dimension of the activity to be developed, the volume and importance of its income, the complexity of the real estate asset and its differentiated use by different tenants”, which has led the company to “outsource the entity Z specialized in real estate management, which will carry out all the tasks inherent to the lease management”.
In view of the above and considering that: (i) the literal wording of the law requires the existence of an employee with a full-time employment contract dedicated to the leasing activity; (ii) there are recent negative precedents (both administrative and judicial) that do not apply this criterion; and (iii) the doctrine now taken up by the Tax Authorities is based on very specific factual elements (with particular emphasis on the large volume and complexity of the company's real estate assets), we understand that it is necessary to analyze on a case by case basis whether a leasing entity that outsources the management of leases to a third party, without having its own employee, is or is not carrying out a business activity, and the appropriate preventive measures should be considered (either hiring an employee, requesting a specific tax ruling from the Tax Authorities or, for example, taking out an insurance policy for tax risks).
