Since the 1st of January any company owning property for letting purposes has a clearly defined tax law. These are the so-called "patrimonial companies".

In the following we will explain the characteristics of this kind of company and their different fiscal treatment when compared with normal companies that undergo a more clearly defined economical activity (for example industrial, commercial or professional activities, etc.)

Considerations

1. To ascertain that we are indeed looking at a patrimonial company, firstly its balance sheet must be studied in order to verify:

That more than 50% of the company's assets (property owned by the company) is really involved in an economical activity (that the company has a premises from which it runs the activity and a full time employee with a registered work contract).
That more than fifty percent of the company's share capital belongs, either directly or indirectly, to ten or less than ten partners, or to a family group.

2. For fiscal purposes the taxable income should be divided into two:

General income corresponding to the annual net income generated from the business activity, taxable at a rate of 40%.
Special income (profit received from the sale of a property that has belonged to the company for more than one year) taxable at 15%

3. The dividends distributed by these "patrimonial companies" to their resident partners are not liable for payment of IRPF (Income Tax) which is to say, the above mentioned corporation tax payable of either 40% or 15% acts as a permanent exemption factor.

4. Tax reductions will not be applicable on any profit gained from assets acquired before the 31st December 1994.

5. If a company can be fiscally classed as a patrimonial company it will be liable for corporation tax, but with the peculiarity that a large part of the regulations regarding income tax will be applicable.

6. If the object of a company is the rental and conveyance of properties (real estate transactions) this will only be considered as an economical activity if the company possesses for the purpose of carrying out the activity:

A premises for the sole purpose of controlling the business.
A full time employee.

7. The maximum amount deductible for expenditure may not exceed the total income, which is to say, a negative net income will not be admitted.

8. Yearly redemptions that subtract from the value of the buildings, with this law pass from 2 to 3% of the value of the building (not including the land value) which is to say, they are admitted as a superior expense.

9. The deduction of expenses is only applicable if the property is let, which is to say, if no rental income is received, or the property remains empty, no expenses are deductible.

10. The properties that are not for let, those that remain empty or are used by family members must be attributed a presumed income of 2% calculated over the official (cadastre) value. Should an official value not yet have been assigned, for example, in the case of a new building, then other specific regulations must be consulted).

11. The principle deductible expenses for properties under lease are:

Any interest generated from mortgages.
The municipal real estate tax known as the IBI (rates).
Community, administration or door-keeping expenses.
Non-guaranteed income (any failure by tenants to pay the rent).
Repairs and renovation work.
Property insurance.
Water and electricity supplies if they are specified in the letting contract to be in the name of the owning company.
Redemptions of 3% over the value of the building (land value not inclusive).
Expenses involved in the preparation of letting contracts (solicitors).

12. Important. Properties being let with a fixed letting contract may benefit from 50% reduction over income, although this is only applicable if the partners are individuals resident in Spain. This reduction is not applicable when the properties under lease are business premises or are being simultaneously managed by other companies (for example, the management letting of properties to tourists through tourist agencies).