Taxation of income from renting out the property


You are usually subject to tax on the income from renting the property. However, exact taxes and tax rates may vary from country to country. The tax base for rental income is the amount of income from which certain costs and tax benefits can be deducted.

If the owner is an individual, then the income from the rental is subject to the “IRPF” (Personal Income Tax), and if the property is rented out as a business, the taxes must be paid according to the corporate tax. In both cases, certain costs can be deducted from the tax base. Below is a detailed look at each version:

1. NATURAL PERSON

As a natural person, you can buy real estate in your own name and rent out your property without any problems. This rental activity is subject to personal income tax, even if you are a “resident” or “non-resident.”

1.1 INCOME TAX FOR NON-RESIDENTS – IRNR

If you are a non-resident in Spain (meaning you stay in Spain for less than 183 days during the calendar year) and you own real estate here, you must meet your tax obligations as you are taxed according to the Spanish income tax for non-residents, known as IRNR.

The non-resident income tax or IRNR is a direct tax on income earned in Spain by individuals and organizations not resident in Spain.

Non-residents living in an EU member state who rent out their property in Spain pay income tax of 19% on the net return (not the gross rent).

These investors can deduct all the costs of the property, in proportion to the duration of the rental of the property. Some of the deductible costs are:

  • notary fees
  • IBI (property tax)
  • garbage collection fee
  • depreciation of the property
  • repair and maintenance costs
  • common cost
  • interest on loans taken out for the acquisition or development of real estate
  • legal costs

1.2 INCOME TAX OF RESIDENTS – IRFP

If you are resident in Spain, i.e. you stay in the country for more than 183 days during the calendar year, you are subject to personal income tax known as IRPF.

IRPF is a direct personal income tax based on your total income, including your salary, pensions and any rental income. Taxable income is the difference between earned income and expenses deductible under Spanish law.

Therefore, if you are a Spanish resident property owner, you must declare your rental income in your annual IRPF income tax return (“IRPF,” “rendimiento de capital intensive”). EU citizens are entitled to the same tax rates and benefits as Spanish citizens.

IRPF is progressive, meaning different bands depend on your earnings. It is important to note that these tax rates differ in other regions of Spain. However, to give you an approximation, below are the income tax bands set by the Spanish state in 2019:

0-12,450€ 19%
€12,450 – €20,20024%
€20,200 – €35,20030%
€35,200 – €60,00037%
€60,000 –45%

This tax rate is lower than the Spanish corporate tax (25%), and operating costs are lower. However, the tax reduction possibilities are lower since it is only possible to reduce certain cost concepts and only proportionally based on the duration of the property’s activity.

2. LEGAL ENTITY

Income from the rental of property located in Spain is subject to tax in Spain, based on double taxation agreements between Spain and most European countries.

If the owner is a business, the income from the rental of the property is subject to the “Impuesto sobre Sociedades” (IS, Corporate Tax). The IS tax rate is usually 25% but may vary depending on the amount of tax paid by the taxpayer and other factors. The tax base is the gross income from the rental of the property, from which the authorized costs and tax benefits can be deducted.

As a legal entity, there are two basic ways to buy and rent real estate in Spain:

2.1 AS A BRANCH OF A DOMESTIC BUSINESS

If you want to run a rental business in Spain, you can register your company in Spain. If you already have a company established in your country, you can buy through it, provided that it has been authorized in its articles of association to carry out rental activities. The company’s founding document must be translated, and a tax number must be obtained from the Spanish tax authorities.

2.2. AS A SPANISH LEGAL ENTITY (SL OR SA)

In the event that you wish to carry out a permanent business activity in Spain and, as in the previous case, you wish to employ material and/or human resources (employees, etc.) in Spain, you can choose to create an independent company in Spain, which is either a SL (Limited Company) or an SA ( Sociedad Anónima) can be. These are completely independent businesses, they will not operate as a “branch” or “subsidiary” of your company.

This business activity and its income and expenses are subject to Spanish corporate tax at a rate of 25%. This tax is higher than income tax and has higher operating costs (accountant, tax advisors, etc.), but with all losses and expenses from the activity, it has a wide range of tax reductions.