Landlords: VAT liability when renting-out a property in Spain

If you are thinking of renting-out a property in Spain , then normally this type of activity would be considered to be exempt from VAT.

However, that will not be the case if your tenant decides to begin carrying-out a business activity in the rented property. In this case , you have the obligation to deduct VAT and then make the corresponding quarterly VAT declarations to the Spanish Tax Office. This means you should add to the agreed rent , 21% VAT (IVA in Spanish) .

In addition , the VAT should be  calculated on the total rental income to be paid by the tenant even if the tenant is only going to allocate part of the home to economic activity ( for example, even if only a single room is required for carrying-out the development of the economic activity and the rest of the house is intended as a habitual residence).

Be Careful When Drafting the Lease

For this reason, it is very important that the lease is well drafted by a professional, who can provide good advice and make it clear whether or not you, as a landlord, should allow the possibility that your tenant carries-out a business activity in the rented property. Should you decide to go ahead and permit the activity, it is also desirable to include the obligation that the tenant has to communicate the start of such activity to you within a specific period of time ( e.g. 10 days from the start of the activity) .

Thus, if the tenant fails to comply with that obligation of communication within the fixed term , you always could argue that there is breach of contract and therefore terminate the lease.

It is important to take into account that in the event that the Spanish Tax Agency initiate a check on the matter and realise that a business activity is being carried-at the property, the Tax Agency will file a claim against the landlord and not the tenant, for the unpaid VAT for a period not exceeding the last four years , plus interest and possibly penalties .

Therefore , it is essential to leave this issue clearly resolved in the terms of the lease agreement signed between both parties , to include a well detailed clause for this possibility in particular as well as clearly establishing the consequences that will arise from a lack of communication by the tenant of the commencement of such activity or, in the case that there is a delay in such notification, setting where the liability will lie.

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