Advisory services for asset-holding companies in Mallorca

Managing real estate through a company can be useful for certain family estates and investors in Mallorca, but setting up a holding company does not guarantee paying less tax. Before contributing a property, buying new real estate through a company, or creating a holding structure, it is necessary to compare the taxation of the individual with that of the company, the use of the properties, financing, family succession, and the cost of subsequently extracting profits.

At Gestoría G1, with service in Mallorca and tax, accounting, labor, and legal services, the asset structure can be analyzed, the company's accounting can be managed, and its tax obligations can be coordinated. The starting point should be to determine whether the entity will be fiscally asset-holding or whether it actually carries out an economic activity.

What a holding company really is

The Law 27/2014 on Corporate Income Tax defines the asset-holding entity for tax purposes. The label does not depend on the company's name, what its bylaws state, or whether its partners call it a "real estate company".

In general, an entity is considered a holding entity when more than half of its assets consist of securities or are not tied to an economic activity, taking into account the exceptions provided for by the law itself.

To determine whether that 50% is exceeded, the regulation uses the average of the quarterly balance sheets for the tax year —or the consolidated balance sheets if the entity is part of a group under the legal terms—. Therefore, there is no rule of “more than 90 days of the year” to calculate the status of a patrimonial entity for Corporate Income Tax purposes.

The classification can change from one tax year to another

A company can be an asset-holding company one year and cease to be one the next if the composition of its assets changes or it begins an economic activity that meets the legal requirements.

This makes it necessary to review each fiscal year:

• What real estate and securities the company owns.
• What assets are tied to an economic activity.
• What cash balances exist in the treasury.
• What corporate holdings may be excluded from the calculation in accordance with the law.
• How the average of the quarterly balance sheets evolves.

When rental of real estate is considered an economic activity

This is one of the issues that most changes the taxation of a real estate company.

For the purposes of the Corporate Income Tax Law, in the leasing of real estate , an economic activity is understood to exist only when, for its management, at least one employed person with an employment contract and full-time hours is used.

Furthermore, having an employee does not automatically turn the entire company into a non-holding entity. The activity and the composition of the assets must be analyzed jointly in accordance with article 5 of the LIS.

Asset-holding company or properties held personally: what to compare

There is no universal answer. For a rental portfolio, a family wanting to organize a succession, or an investor reinvesting profits, the company can offer operational advantages. For a person who owns one or two homes and needs to withdraw all the rental income to live on, personal taxation may be more efficient.

The most frequent error is comparing a “25% Corporate Tax” with the marginal IRPF rate without including the subsequent taxation when the partner extracts the company's profits.

Corporate Tax of a holding entity

Holding entities are subject to the general rate of 25%.

The regulations prevent the reduced rates provided for certain entities with a reduced turnover and the 15% rate reserved for new entities that carry out economic activities and meet their conditions from being applicable to them.

This is especially relevant because the rates applicable to micro-enterprises and small-sized companies have been subject to progressive changes, but the asset-based condition leaves these entities outside those benefits.

Capitalization reserve: not prohibited for being an asset-holding entity

Article 25 of the LIS regulates the capitalization reserve for taxpayers who are taxed in accordance with certain sections of Article 29 and meet the required conditions.

There is no general exclusion stating that any asset-holding entity is prohibited from applying the capitalization reserve. If its requirements are met, its application should be considered.

Equalization reserve: here there is indeed a limitation

The leveling reserve is part of the tax incentives for small-sized companies. Article 101 of the LIS expressly excludes asset-holding entities from this regime.

Therefore, an asset-holding entity cannot equate “capitalization reserve” and “leveling reserve” as if both were prohibited for the same reason.

Rental of housing: company versus individual

An individual who obtains income from the lease of a dwelling may apply, when the requirements of article 23 of the Personal Income Tax Law are met, reductions on the positive net income.

In contracts to which the current regime applies, the general reduction is 50%, with higher percentages of 60%, 70% or 90% in certain legally defined cases.

A company that obtains the same income does not apply these personal income tax (IRPF) reductions. It integrates the tax result into the Corporate Income Tax (IS).

Therefore, before transferring rented properties from an individual to a company, the following must be modeled:

• Annual net income.
• Financing and deductible expenses.
• Personal income tax (IRPF) reductions that would be lost.
• Corporate Income Tax (IS) rate.
• Need to distribute dividends to shareholders.
• Tax cost of contributing the properties to the company.

VAT, ITP and AJD in a real estate company in Mallorca

Indirect taxation depends on each transaction and not on whether the entity is a holding company.

Residential property leasing

The leasing of a dwelling intended exclusively for residence is, as a general rule, exempt from VAT when the legal requirements are met. The exemption conditions the right to deduct the input VAT related to those transactions.

Premises, offices and certain garages

The rental of premises and other properties not included in the housing exemption is usually subject to VAT, normally at the standard rate.

Holiday rental

The taxation of a tourist rental depends on the services provided. The provision of services typical of the hotel industry may alter its VAT treatment.

In addition to taxation, tourist exploitation is subject to Balearic tourism regulations and to the restrictions applicable to the property and the municipality.

ITP in the acquisition of real estate in the Balearic Islands

When a real estate acquisition is subject to the Transfer Tax (ITP), the Balearic Islands apply a general progressive scale that currently includes brackets of 8%, 9%, 10%, 12%, and 13%, without prejudice to reduced rates or special rules when their requirements are met.

In other transactions, VAT and, where applicable, Stamp Duty (AJD) may apply. Therefore, the acquisition cost must be calculated before deciding whether the individual or the company should purchase.

Wealth Tax: shareholdings are not automatically exempt

Individual partners must analyze how their shareholdings are valued and whether or not there is an exemption in the Wealth Tax.

In the Balearic Islands, the regional exempt minimum for residents is currently 3,000,000 euros and the progressive rate reaches higher rates for large estates.

The exemption for business holdings under Article 4.Eight of the Wealth Tax Law requires meeting several requirements regarding the entity's activity, ownership percentage, management functions, and remuneration, among others.

It should not be automatically asserted that “if a company is asset-holding under the LIS, an exemption under the Wealth Tax can never exist” without conducting a specific analysis of the Wealth Tax Law. The concepts are related, but the rules of both taxes are not identical.

Large estates

High-value estates must also review the Temporary Solidarity Tax on Large Fortunes, whose return remains in force for taxpayers within its scope.

Inheritance tax in the Balearic Islands and family companies

Inheritance tax rules in the Balearic Islands have changed significantly.

For acquisitions by reason of death, groups I and II may currently apply a 100% reduction of the corrected full tax liability when the legal requirements are met.

For certain relatives in group III, there is a 60% reduction, and for the rest of the subjects in group III, a 35% reduction, subject to the conditions provided for by the regional regulations.

These general reductions should not be confused with the specific tax benefits linked to holdings in family businesses.

Family business and asset-holding company are not synonymous

To apply the family business benefits, specific requirements must be verified, including those related to the Wealth Tax exemption and the entity's activity.

It is not enough to create a company, hire a person, or draft a family protocol to guarantee an inheritance tax reduction.

Planning must be done before transferring the shares and simultaneously reviewing:

• Company activity.
• Asset composition.
• Family participation.
• Management functions.
• Remuneration.
• Regional inheritance tax rules.

Accounting for a holding company

The fact that a company does not carry out intense business activity does not exempt it from its commercial and accounting obligations.

A commercial company must keep its accounts in accordance with the applicable accounting framework, prepare and approve its annual accounts, and file them with the Commercial Registry within the legal deadlines.

Annual accounts and registry closure

The ordinary general meeting must be held within the first six months of each fiscal year to review the management of the company and, where applicable, approve the accounts of the previous fiscal year and resolve on the application of the result.

The accounts must be deposited with the Commercial Registry within the month following their approval.

Failure to file may result in the closure of the commercial registry for certain acts and may lead to economic sanctions. The Capital Companies Act establishes fines of 1,200 to 60,000 euros per company and year, with the limit potentially rising to 300,000 euros when annual turnover exceeds six million euros.

Depreciation of real estate

Land is not depreciated. The value of the land must be separated from the value of the construction.

The LIS tax depreciation table does not establish a 3% rate for all buildings:

Accounting depreciation and its tax deductibility must be analyzed according to the use, date of entry into service, and value attributable to the construction.

A market increase does not allow freely revaluing the property in the accounting records

The fact that a villa acquired years ago for 500,000 euros now has a much higher market value does not mean that the company can freely increase its book value and carry the difference to reserves.

The General Accounting Plan is based on cost and establishes specific rules for valuation, impairment, and reversal. Accounting revaluations require specific regulatory coverage.

Therefore, the book value must be distinguished from the value that may be relevant for Wealth Tax, Inheritance Tax, property sales, or company valuations.

Common tax forms for a company holding real estate

The specific obligations depend on the transactions carried out. Among the forms that may be required are:

• Form 200: Corporate Income Tax.
• Form 202: installment payments, when there is an obligation to file them.
• Form 303: VAT, when taxable transactions are carried out and there is an obligation to self-assess.
• Withholding forms: when the company pays income subject to withholding.
• Form 720: only if the entity itself has assets or rights abroad that give rise to the reporting obligation and no exception applies.

There is no identical list for all asset-holding companies. The census configuration must be adapted to the actual operations.

Special regime for entities dedicated to the rental of housing

The LIS maintains a special regime for entities whose main economic activity is the rental of housing located in Spanish territory.

Among its requirements are:

• That the number of dwellings leased or offered for lease is at all times equal to or greater than eight.
• That the dwellings remain leased or offered for at least three years.
• That there is separate accounting to determine the income corresponding to each dwelling.
• That, when there are complementary activities, the legal percentage of income or assets linked to the lease is met.
• That the regime is opted for and communicated to the tax administration under the terms provided.

Furthermore, by requiring that the lease constitute an economic activity, the full-time employee requirement of article 5 of the LIS must be taken into account.

The bonus is no longer 85%

The current bonus on the portion of the full tax liability corresponding to income derived from the leasing of dwellings that meet the requirements is 40 %.

Therefore, still using the old 85% rate significantly overvalues the tax benefit of this regime.

Holding company with real estate: advantages and limits

A holding company can be useful for separating risks, organizing shareholdings, bringing in investors, or centralizing resources. But it should not be considered an automatic formula for selling real estate while paying very little tax.

Exemption for dividends and capital gains

Article 21 of the LIS establishes an exemption for certain dividends and income derived from shareholdings when, among other requirements, percentage and holding period requirements are met.

The exemption generally incorporates a reduction equivalent to 5% for management expenses, which is often described as an effective 95% exemption.

However, there are specific limitations when shares of a asset-holding entity are transferred. In such cases, it cannot be assumed that all the capital gain from the sale of the subsidiary will automatically be 95% exempt.

Selling shares does not always avoid real estate taxation

The securities market legislation contains an anti-abuse rule for certain transfers of shares in companies whose assets consist mainly of real estate located in Spain that is not used for business or professional activities.

When the transaction is used to circumvent the taxes that would have applied to a real estate transfer, the exemption inherent to securities transfers may not be applicable.

Contributing properties that are already owned by the partner to the company

Incorporating a new company and “transferring” to it the properties that a person already owns can have a significant tax cost.

A non-cash contribution is a transfer for tax purposes and may generate a capital gain or loss in the contributor's personal income tax (IRPF) in accordance with its valuation rules.

There is a special tax neutrality regime for certain contributions, but it does not automatically apply to any home or investment property.

Article 87 requires important requirements for individuals

When an individual contributes assets other than certain shareholdings, the application of the special regime requires, among other requirements, that those assets be used in an economic activity whose accounting is kept in accordance with the Commercial Code.

Therefore, a property that an individual holds as a passive investment and that is not used in an economic activity cannot be assumed to fall within the neutrality regime.

Before contributing existing real estate, you must quantify personal income tax (IRPF), municipal capital gains tax when applicable, indirect effects, and registry and notary costs.

Incorporating a holding company (SL) in Mallorca

Since there is no corporate form called a “holding company,” the usual approach is to incorporate an SL and then, based on its assets and activity, it may or may not be classified as a holding company for tax purposes.

Minimum capital of the SL

The legal minimum share capital of a limited company is currently 1 euro.

When the capital is less than 3,000 euros, special rules apply: at least 20% of the profit must be allocated to the legal reserve until the sum of capital and reserve reaches 3,000 euros and, in the event of liquidation with insufficient assets, the partners are jointly and severally liable for the difference between 3,000 euros and the subscribed capital.

Therefore, it should no longer be explained as if there were a “normal limited company of 3,000 euros” versus a “successive formation limited company of 1 euro”.

Usual steps

1. Reservation of the company name.
2. Definition of partners, administrator, capital and bylaws.
3. Granting of the public deed.
4. Obtaining the tax ID number and filing the census registration using form 036.
5. Registration in the Commercial Registry.
6. Accounting and tax configuration of the actual activity.

The incorporation of companies is exempt from the corporate transactions category of ITP-AJD, without prejudice to the corresponding formal procedures.

Notary, registration and advisory costs depend on the capital, bylaws, contributions made and complexity of the transaction; it is not rigorous to establish a universal range for any asset-holding company.

Personal use of a property owned by the company

If a company allows a partner to use a property it owns free of charge, it should not be treated as if the property still belonged personally to the partner.

Transactions between the company and its related partners must generally be valued at their market value in accordance with Article 18 of the LIS.

The specific tax consequence will depend on why the property is transferred, the relationship of the partner with the company, and how the transaction is documented. There may be effects on Corporate Tax and on the partner's personal taxation.

Signing a rental contract at market value can be a solution in certain cases, but it should not be presented as an automatic answer for any family structure.

When a holding company in Mallorca can make sense

It may make sense to consider a company when there is a significant portfolio of assets, a willingness to reinvest profits, several family members who need clear governance rules, corporate financing, risk separation, or a long-term succession strategy.

It may be less attractive when there are few properties, residential rentals enjoy significant reductions in personal income tax, the partners need to withdraw all the income annually, or the initial contribution of the assets generates a high tax cost.

The decision must be built on a tax and financial simulation, not solely on a comparison of nominal rates.

Gestoría G1: tax and accounting management of companies in Mallorca

Gestoría G1 provides tax, accounting, labor, and legal services and offers in-person attention in Mallorca, with offices in Palma and Alcúdia, in addition to digital attention.

For owners and investors who use companies to manage real estate, the service can include:

• Company accounting.
• Corporate Income Tax and periodic obligations.
• Review of related-party transactions.
• Annual accounts.
• Census registrations and modifications.
• Tax analysis of acquisitions and transfers.
• Coordination of estate and succession planning with the corresponding legal professionals.

The firm also offers service in Spanish, English, German, French, and Italian, which is especially useful for international owners and investors with assets in Mallorca.