The Free housing transfer to partners by your own company is legal. Buying and enjoying a home through a company of which you are a member is not contrary to the law. There must be the corresponding consideration on the part of the partner. And the imputation of the income from the lease by the company in its corporate income tax.
And since these are “related parties” in accordance with Article 18 of the Corporation Tax Act, the rent paid must be in accordance with the market value. In other words, the rent that would have been agreed upon by independent persons or entities under conditions that respect the principle of free competition.
However, it is very common to find those who, due to ignorance or forgetfulness, use as permanent or temporary housing a property owned by the company of which they are partners. And without any compensation for the use of the home. And therefore without taking into account the important implications that this entails for the Tax Administration. As the experts of our tax consulting service, summarize below.
Free housing transfer to partners. Tax Implications for Residents.
We deal with three taxes involved.
Personal Income Tax.
In accordance with article 42.1 of the Personal Income Tax Law, they constitute income in kind. The use, consumption or obtaining, for private purposes, of goods, rights or services free of charge or at a price lower than the market price. Even when they do not represent a real expense for the person who grants them. Therefore, for the member, the free use of the dwelling constitutes remuneration in kind.
Specifically, this free use of the dwelling is considered to be a dividend in kind. Therefore, it will be imputed as Income from Movable Capital (Article 25.1 and d) LIRPF). It is included in the taxable base of the member’s savings. Taxing jointly with the rest of the savings elements (Capital Gains, dividends, interest, etc.) at the following rates (in force in 2019): 6,000 euros at 19%; 44,000 euros at 21%; the rest at 23%.
With regard to the valuation corresponding to this remuneration, the partner should include in his personal income tax return as income from movable capital an amount equivalent to the market value of rents with similar characteristics. With regard to the type of property, square metres and its location, between independent entities or persons.
And to the previous value would have to be added the so-called deposit on account. Advance payment of the partner’s tax on the dividend in kind. The payment on account will be the result of multiplying the value of the remuneration in kind increased by 20% and multiplied in turn by the retention of 19%.
The free transfer of a property in favour of a partner constitutes a presumed income for the company. Which, if applicable, should be declared as such in its Corporate Tax, taxed at the general rate of 25%. The income to be computed should be close to the market value of rents of similar characteristics.
The taxation of these rental income would be subject to quarterly advance payment on account of Corporate Income Tax. By means of the payment in instalments.
In addition to constituting a taxable income for the company, in accordance with article 15.a of Law 27/2014 on Corporate Income Tax, this donation in favour of the partner is not deductible for the company.
Transfer Tax (ITP).
In the event that the company’s dwelling is used, the tenant acquires the right to use the dwelling, which is the taxable event that determines the taxation by ITP by the tenant (article 7.1 b ITPAJD Law). It is a tax of autonomous regulation that, although the payment of the same is frequently forgotten, there is a legal obligation to pay it and, therefore, the risk of its claim, otherwise.
The payment of this tax must be made in the 30 working days following the signing of the lease contract and for the entire duration of the contract, with a minimum of three years.
Free transfer of housing to members. Non-Resident Income Tax (IRNR).
In the case of foreign companies that own or acquire real estate in Spain, the use of which benefits their non-resident partners or administrators, it will be necessary to resort to the specific Agreement to avoid double taxation in matters of income and wealth taxes, as well as to the Non-Resident Income Tax Law (TRLIRNR). The latter states in section 2 of article 12 that, in the absence of proof to the contrary, benefits or assignments of goods, rights and services likely to generate income subject to this tax shall be presumed to be remunerated.
For its part, article 13.1.g) considers income obtained in Spanish territory, among others: g) Income derived, directly or indirectly, from real estate located in Spanish territory”.
Therefore, in accordance with the foregoing, the non-resident company will obtain a presumed taxable income in Spain. Derived from the use of the property by the shareholder.
How these incomes are valued
With regard to the valuation of these rents, Article 15.2 of the TRLIRNR refers to Article 18 LIS, i.e. the market value.
As for the partner or administrator, he obtains the availability of the property located in Spain, giving several options in its possible taxation:
- If he is a non-resident administrator. For the enjoyment of a property in Spain owned by a non-resident company, it will not be taxed on the basis of Article 21 of the OECD Convention. If you are a resident, you will be charged a dividend in kind to be included in your savings base, to be taxed like any other resident on your personal income tax:000 euros at 19%; 44,000 euros at 21%; the rest at 23%.
- In the case of a non-resident partner who has a professional relationship with the foreign company and the partner does not have a Permanent Establishment in Spain where he can carry out his activity, taxation in Spanish territory derived from the free use of the property located in Spain will not be subject either (article 14 of the OECD Convention). If you are a resident, you will be taxed on your IRPF as a Spanish resident: 6,000 euros at 19%; 44,000 euros at 21%; the rest at 23%.
- If the partner is not resident in Spain and has no professional relationship with the non-resident company. The free use of a property in Spain will be classified as a dividend in kind to which Article 10.5 of the OECD Convention applies. The dividend in kind for free use will not be taxed in Spain. In the case of a partner resident in Spain, the dividend in kind for free use in Spain will be taxed in Spain on the partner’s income tax, and may be withheld in the country of residence of the company up to the limit set by the Convention (15% as a general rule).
Therefore, we see that the free transfer of housing to partners itself is legal. But it has tax implications both for the partner, whether resident or not in Spain, and for the company as well.