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Tax Implications on Renting in Mallorca

Will Besga Explains Taxes on Property in Mallorca

featured in Property news Author Will Besga - Mallorca Law, Mallorca Contributor Updated

In previous articles, I have discussed the two varieties of short term rentals that you can engage in, namely, “Ordinary” and “Touristic”, and how you can rent out without a touristic license (by having an appropriate contract and following some operational guidelines) flats and terraced houses, but also detached houses and semis.

You will remember that licenses are only granted for the latter, but the point is that if you have a house or a semi, you actually have a choice of how to go about renting it. That is, although you can apply for a license in order to let your villa out, you have the choice of doing it without a license (‘touristically´), and engaging in what I call an ordinary, short-term rental. The decision will impinge on your needs and on the differences between short-term touristic rentals and short-term ordinary rentals. Today, I want to highlight the tax implications of both types of rentals.

In a touristic rental, you are compelled by law to charge your tenants VAT at10%, and this brings a number of consequences.
If you charge VAT, then you have to pay it back to the treasury, and you do so by doing quarterly VAT returns. In addition, if you are a non-resident, you should also file income tax declarations on a quarterly basis. Apart from these quarterly declarations, naturally, you still have to do annual ones. Bear in mind that for both residents and non-residents, certain specific costs can be deducted from the taxable amount (the revenue from the rentals) and VAT can also be offset, with the effect of reducing the amount of taxes paid.

By contrast, a non-touristic or ordinary rental does not incur VAT, and therefore there are no quarterly declarations of VAT or income tax to be made. The actual profit (because costs can also be offset) is accounted for in a general annual income tax declaration, either a resident of a non-resident one.

The situation, however, changes in ordinary rentals if you are managing them as an agent, that is, if you are managing for example a number of apartments on behalf of their owners. A short-term ordinary contract has to be made, in amongst many other things, between tenant and landlord. Since you are an agency, however, you should be invoicing directly to the tenant a percentage of the rental price, and this percentage has to be invoiced with VAT, as it is your agent’s fee. At the same time, the landlord obtains the rest of the rental price in its totality without charging VAT. Yet the fact that the agent’s cut requires VAT means that you will be doing quarterly VAT declarations. In addition, because you are an agent, you must be established as a company or as an autónomo (sole trader). If you are, you have to also do income tax declarations every quarter, plus of course the annual one.

In addition, because the contract is between landlord and tenant, and the agent has to invoice the tenant his booking fee, this type of setting should involve a double contract, but that is for another time.

As you can see touristic and non-touristic rentals are operationally different because of the VAT implications, but these differences disappear once VAT is introduced in non-touristic rentals by way of the ‘booking’ fee. Often, however, the decision as to the type of rental is sometimes taken for us: if you don’t have a house or a semi, an ordinary rental is your only option. In most cases though the decision as to which type of rental you opt for is in your hands.

Will Besga is a lawyer in Palma.