Rental of a commercial premises for use as permanent residence

The Spanish Tax Directorate (DGT) has recently examined a particular but increasingly common scenario: a landlord renting out a commercial premises to be used by the tenant as their primary residence, without any underlying business purpose.

This clarification is relevant for understanding the tax implications of such leases under both VAT and Personal Income Tax (IRPF).

IVA: subject to tax, but exempt when used as housing

According to the Spanish VAT Law (Articles 4 and 5), any lease of real estate for the purpose of generating regular income is subject to VAT, even when carried out by an individual.

However, Article 20.U.23º introduces an important exemption: if the property, even if classified as a commercial premises, is effectively and demonstrably used as a permanent residence by a natural person, the lease is exempt from VAT.

This exemption does not apply if the tenant is a company that does not allocate the property as employee housing, if it is converted into an office, or if hotel-like services are provided.

Personal Income Tax (IRPF): real estate capital income

With regard to IRPF, the DGT clarifies that rental activity is only considered an economic activity when the landlord employs at least one full-time worker to manage the rentals (Art. 27.2 of the IRPF Law).

If this condition is not met, the income must be declared as real estate capital income (Art. 22.1 of the IRPF Law). While there is no specific exemption, the reduction established in Article 23.2 may apply when the lease is used for housing purposes.

Conclusion

Even if the property is legally considered a commercial premises, if it is used as the tenant’s main residence, the rental benefits from a VAT exemption and is taxed under IRPF as real estate capital income.

It is essential that both the lease agreement and the actual use clearly prove its residential purpose, since otherwise the Tax Authorities could reclassify the transaction with more burdensome tax consequences.

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