The Spanish government has launched a series of measuress to "save" rental tenants who, due to the loss of income as a result of the COVID-19 outbreak, cannot afford to pay rent. Some rental companies have already begun to apply rent arrears and even waivers for their tenants. However, even if the owner does not earn rental income during a certain period of time, the corresponding taxes must still be paid.
The agreements that can be reached between landlords and tenants include the suspension of rental payments for tenants most affected by the crisis or a moratorium for a certain period of time, as highlighted by José María Salcedo, a partner in the Spanish law firm Ático Jurídico.
Whatever measure is taken, Salcedo strongly recommends that the agreement reached between the parties should be documented in writing, since, for tax purposes, the difference between a simple non-payment of rent and an agreement to exempt rent or a moratorium is very important.
For example, the non-payment of rent does not exempt the owner from declaring income tax or from paying VAT. Landlords should keep in mind that it is then legally possible, on some occasions, to deduct certain balances regarding income tax and modify the taxable base of VAT to compensate the non-payment. Therefore, it is important to prove that the tenant has not defaulted the payment, but that it is an agreement between owner and tenant.
How the owner must pay tax in the midst of the COVID-19 crisis
- Exemption from the payment of rent: if the property is subject to VAT (commercial premises, for example), the suspension of the payment of rent would be equivalent to the free transfer of the property during the agreed period, for reasons inherent to the economic activity. And the owner could be freed from having to pay the VAT he has not collected.
If the property for rent is a residential property, the lessor will not have to pay tax on income from real estate capital which, according to the agreement signed, cannot be demanded from the tenant. Therefore, a landlord must declare an income that will be 2% of the cadastral value (1.1%, if the property is in a municipality with revised values).
"If the rental income is taxed as an economic activity (by having someone dedicated to it full-time), the taxpayer should not include in its income tax such income because according to the agreement reached with the tenant, the rent is no longer payable," says Salcedo.
- Moratorium on rental payments: the owner does not exempt the tenant from payment, but defers payment, so the rent is still due in the future. This delay in payment does not exempt the landlord from paying income tax (as a return on real estate capital, or as an economic activity), or VAT. Salcedo, the partner from Ático Jurídico considers that landlords should allocate the income to the period in which it is due (annual, in the case of IRPF, and quarterly or monthly in the case of VAT), according to the agreement reached.
- Partial payment of the rent: if partial payment of the rent is agreed and part of the remaining amount is deferred, the owner must pay both personal income tax and VAT when the rent becomes payable.
What happens to income tax retentions in the event of non-payment of rent
In case the tenant is a company or a professional, the property is subject to a 19% retention and this retention is not applied until the rent is paid. Salcedo reminds landlords that the income tax retention will be made at the time the rent is paid, not before.
Finally, Salcedo points out that "when the agreement is respected, and the tenant pays in the agreed form, the owner can only deduct tax return from the retention actually made in the income tax. And when such retentions have not been made, because the payment of the rent has not been agreed, nothing can be deducted in the income tax return".
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