How to find out whether a company is a property company for corporate tax purposes

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The property company is a useful tax-saving instrument. But, in which cases is it subject to Corporate Tax? We tell you in this article…

When is a property company subject to corporate income tax?

Creating an asset-holding company with its Articles of Association makes sense when one person or several persons own several properties, land or premises. In these cases, it is usually more economical to do so because it is taxed at the general rate of 25% corporate income tax (IS), rather than at the personal income tax rate, which can be higher.

However, for the asset-holding company to be taxed under IS, and not IRPF, it has to meet one condition. This is that more than half of the assets must be elements that are not used for an economic activity. Or, to put it another way, they can be rented to third parties, yes, but they cannot be rented to a commercial company that belongs to you. This has percentage exceptions, but that would be the general idea.

This company structure is designed for people who have a certain amount of real estate or movable assets. If this is profitable, it is an intelligent alternative for management. There are asset-holding companies for holding real estate, for the use and enjoyment of real estate, for leasing or renting real estate and for holding securities. The type of assets may be different, but the tax philosophy is the same.

It is obvious that holding companies are often used to receive rental income. But these, if they are residential rents, would not necessarily be considered to be connected to an economic activity, to give an example.

How to check that a property company is taxed for IS tax purposes

In order for an asset-holding company to be taxed under IS and not be considered irregular, the condition that the assets do not carry out economic activities must be met. How can this be verified?

A part of the assets may be used for economic activities, but never more than 50%. To do this, it is sufficient to check the company’s income for the last four quarters. If this average threshold is not exceeded, there is no problem and it can be taxed in accordance with the IS. If this is not the case, the income would have to be taxed under personal income tax (IRPF).

In this verification process, obviously, the accounting books that can prove this circumstance, duly regularised, are required. It is therefore highly recommended that a specialised advisor should indicate whether it is appropriate to incorporate the company and, if so, to handle these matters. For most people, differentiating between the two areas is often complex.

If you have a property (flat, building, house or premises) where you carry out an economic or professional activity, you will need to see whether or not it is worthwhile to include it in this company. If not, you can always dissociate it and leave the rest of the properties inside. It will all depend on the amount of wealth you own and the value it generates in income.

How to know if it is patrimonial

Quarterly balance sheets

To find out whether your company’s assets and liabilities exceed 50% of its assets, take the average of the quarterly balance sheets for the year (not the balance sheet as at 31 December).

And if your company is the parent entity of a corporate group, consider the average of the consolidated balance sheets (whether or not your group prepares consolidated accounts).

Remember that your company should prepare trial balance sheets at least quarterly, and it is these balance sheets that should be used in this audit.

Money and receivables

Likewise, when quantifying whether securities and non-assets exceed 50% of assets, do not include money and receivables from transfers of assets carried out in the same financial year or in the two previous financial years, nor money and receivables from the ordinary course of business.

See an example below.

Example of an asset-holding company

Your company has machinery and other assets worth 150,000 euros and has accumulated cash of 300,000 euros over the last four years. Well, in the IS of 2023, your company may be an asset-holding company depending on the origin of this cash:

Case 1.All the cash comes from the usual activity of the last four years.
Case 2. Of the 300,000 euros, 262,500 euros come from the sale of assets in 2020, and 37,500 euros from the business itself.
Case 3. Same as the previous case, but in this case the assets were sold in 2021.

Concept	Case 1	Case 2	Case 3
Total activo	450.000	450.000	450.000
Machinery and other	150.000	150.000	150.000
Treasury affects	300.000 (1)	37.500	300.000 (3)
Treasury not affected	–	262.500 (2)	–
Is it patrimonial in 2023?	No	Sí	No

As all cash has been generated by the business itself, it continues to be affected in the future (with no time limit to change this consideration).

To prevent this cash from being counted as unaffected, in 2023 it should have been reinvested in assets assigned to the activity, or else distributed among the shareholders as a dividend. As it represents 58.33% of the assets, in 2023 the company becomes an asset-holding company.

These 262,500 euros of cash will cease to be assigned to the activity in 2024.

Disadvantage of having an asset-holding company

Your company may be disadvantaged if such a regime applies to you, as you will lose important tax advantages.

For example:

You will not be able to benefit from the incentives for small companies (accelerated depreciation, equalisation reserve, etc.).
If it has been set up recently, in the first two financial years with profits (the first four if it is a start-up) it will not be entitled to the reduced rate of 15%.
If there are other companies among the partners of the company and they sell their shares, they will have limitations when applying the double taxation exemption incentive in their IS.

To summarise...

An asset-holding company must meet certain requirements before the legislation to take advantage of the tax benefits it offers. At Asesoría Orihuela Costa we offer a comprehensive consultancy service for individuals and companies.