Real estate leasing as an economic activity: update on recent case law
As already discussed in several previous posts, and in particular in the post authored by my colleague Hipólit Borrás i Cantó, which we now update in light of recent case law, the tax classification of real estate leasing remains a crucial issue for family businesses and asset-holding companies in Spain.
As previously noted (without intending to be redundant), it is reiterated that if the leasing activity is carried out by a company and qualifies as an economic activity, the shareholding in that company may be exempt from the Wealth Tax (IP) or from the Temporary Solidarity Tax on Large Fortunes (ITSGF), and benefit from reductions of between 95% and 99% in the Inheritance and Gift Tax (ISD), among other advantages. Otherwise, the activity would be regarded as mere asset management, with the resulting loss of such tax reliefs.
In this context, recent rulings of the Supreme Court and several binding rulings issued by the Directorate-General for Taxation (DGT) have shed some light—albeit not without controversy—on the requirements for real estate leasing to be deemed an economic activity, and on the criteria for applying the exemptions under the IP and the ITSGF.
Requirement of a full-time employee under an employment contract in real estate leasing
Article 27.2 of the Spanish Personal Income Tax Act (Ley del Impuesto sobre la Renta de las Personas Físicas, LIRPF), which is also applicable to companies, defines real estate leasing as an economic activity when two elements are present:
- The existence of at least one premises or office dedicated to the management of the activity.
- The engagement of at least one employee under a full-time employment contract, in charge of the organisation of the activity.
It is this second requirement that has generated the greatest controversy and litigation, and has been the subject of numerous doctrinal and judicial pronouncements, given the variety of cases it may give rise to.
The Tax Administration has traditionally taken the view that the leasing activity must generate a sufficient workload to make the recruitment of a full-time employee “necessary”. In practice, this meant that mere formal compliance with this requirement was not sufficient to establish the existence of an economic activity and, consequently, for the application of the family business tax benefits.
Supreme Court Judgment 956/2025 on real estate leasing and adequacy of the employee requirement
The Supreme Court judgment of 14 July 2025 resolves an appeal—pending at the time of the previous post—concerning the application of the 95% reduction in the ISD to the transfer of shareholdings in a company engaged in real estate leasing.
The Tax Administration had refused to grant the reduction, arguing that the volume and type of leases (in this case, old and long-term contracts) did not justify the functions of the hired employee. It relied on the doctrine of the Central Economic-Administrative Court (TEAC), which required “economic reasonableness” in the recruitment.
The Supreme Court, however, departs from this approach and rules that it is sufficient to comply formally with the requirements of Article 27.2 LIRPF, namely:
- To have one full-time employee under an employment contract.
- To maintain, where appropriate, a premises for managing the activity.
It is not necessary to prove that the employee has a “real and sufficient” workload. The Court stresses that a restrictive interpretation would render the rule meaningless, whose purpose is to safeguard the continuity of family businesses, expressly invoking EU Recommendation 94/1069/EC, which encourages the intergenerational transfer of businesses.
Furthermore, the Court warns that if the Tax Administration contends that the employment contract is “fictitious”, it must follow the proper procedural avenues for challenging simulated legal transactions, proving that there is an underlying agreement different from the one declared. Merely asserting that the recruitment lacks economic justification is insufficient to deny the tax incentives.
Implications of the judgment for real estate leasing
This decision overturns the doctrine of the TEAC and of certain High Courts of Justice, which had required proof that the employee was fully engaged in management tasks. Following Supreme Court Judgment 956/2025, a leasing company that fulfils the formal requirement of hiring a full-time employee may qualify as carrying out an economic activity.
However, the Court preserves the power of the Tax Administration to challenge sham contracts. In other words, if the employee performs no actual work, the Administration may initiate proceedings for simulation.
In conclusion, this judgment represents a shift towards a purposive interpretation favourable to the continuity of family businesses. Nevertheless, even where the formal full-time employment requirement is met, the Administration may still deny the economic activity classification if it properly establishes simulation.
Supreme Court Judgments 970/2025 and 1038/2025 on real estate leasing and employee-partners
These judgments address whether, in order to comply with Article 27.2 LIRPF, an employment contract between a partnership and one of its partners is valid, or whether the mere fact of being a partner automatically invalidates that employment relationship.
The Supreme Court reiterates that what is required is a genuine employment relationship, characterised by subordination and working on behalf of another. The partner status does not, in itself, prevent the existence of a valid employment relationship. What matters is that:
- The partner is subject to the instructions of the management body.
- The partner receives a fixed remuneration.
- The partner contributes to the Social Security system.
- The partner’s functions are not confused with those of the shareholder/partner role.
However, the Court emphasises the need to prove the authenticity and effectiveness of the employment relationship, which will be crucial in future inspection procedures.
DGT Ruling V0942-25 on real estate leasing and part-time employment contracts
In this case, a leasing company employed two part-time administrative workers and had a shareholder-director who also undertook management duties. The DGT concluded that the requirement of employing a full-time employee was not satisfied, and therefore the activity constituted mere asset management.
The administrative position maintains that:
- Several part-time contracts do not equate to one full-time contract.
- The involvement of the shareholder-director does not fulfil the requirement.
- The functions of management and lease administration cannot rest on the same individual.
This stance diverges from that of the TEAC, which had accepted that the same person could perform both functions.
Practical recommendations for real estate leasing in light of the new case law
- Hiring a full-time employee under an employment contract remains the critical requirement for classifying real estate leasing as an economic activity.
- Following the Supreme Court’s judgment, it is no longer necessary to prove the employee’s workload, but the employment relationship must be genuine and effective.
- Hiring several part-time workers does not replace the full-time requirement.
- The Administration may still challenge the authenticity of the employment relationship.
- It is advisable to keep comprehensive documentary evidence: employment contract, payslips, job descriptions, as well as articles of association, minutes and reports demonstrating the shareholder’s management role.
Current case law provides greater clarity, but in the absence of legislative reform adapting the rules to economic reality, disputes are likely to continue. Accordingly, careful and well-documented management is recommended, ensuring that compliance with all requirements can be demonstrated if challenged by the Tax Administration or the courts.
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