Spain's Supreme Court rules employee test for property-letting companies can be met at group level for family business tax reliefs

Spain’s Supreme Court handed down two rulings in February that could benefit family business groups whose holding structures include property-leasing companies with no employees of their own.

The court stepped back from the strict, literal reading of the rules that tax authorities had long insisted upon, favouring instead an interpretation focused on the law's purpose: protecting the tax benefits tied to the transfer and survival of family businesses. At stake are two of the most valuable reliefs in this area: the Wealth Tax exemption and the 95% reduction in Inheritance and Gift Tax on share transfers.

Personal income tax

Under Spain's personal income tax law, property letting is the only activity that explicitly requires at least one full-time employee on the payroll to qualify as a genuine economic activity. Without this requirement, the properties are not treated as business assets, which means they fall outside the Wealth Tax exemption, and the shares in the holding company lose their entitlement to the 95% reduction in Inheritance and Gift Tax on family business transfers.

Until these rulings, tax authorities required each letting company to prove its own compliance. Staff employed elsewhere in the group did not count. Administrative courts and regional high courts had broadly backed that position.

Share-gifting cases

The cases behind the two rulings centred on the gifting of shares in the parent company of a family business group. One of its subsidiaries owned rural properties that it leased out but had no employees of its own. Day-to-day management was handled by staff from other group companies – which together employed an average of 41 people – and the lease agreements incorporated complementary services provided by other group companies.

Tax inspectors excluded the leasing subsidiary’s assets from the taxable base and issued an assessment. Both the regional Economic-Administrative Court and the regional High Court sided with the authorities.

Supreme Court decision

The Supreme Court overturned the lower court and granted the taxpayer the full 95% reduction. Its central finding: what matters is not who holds the employment contracts but the economic and functional reality on the ground. Where a leasing company is woven into the broader activity of a group, with the group’s staff and resources genuinely involved in running it, it cannot be judged in isolation. The court’s key test is whether the leasing company serves the group’s economic activity, not simply whether it draws on the group’s workforce.

As a binding point of case law doctrine, the court ruled that the full-time employee requirement under article 27.2 of the Personal Income Tax Act is satisfied when a leasing company belongs to a group with genuine economic activity, its management is carried out using the group’s human and material resources, and it is functionally integrated into that activity. The ruling comes with a clear caveat: where a company’s link to the group is purely formal – with no real operational or economic ties – the staffing requirement must still be met independently.

Practical implications

The ruling is not a free pass. The burden of proof falls on the taxpayer, who must show that the leasing company is genuinely integrated into the group, not merely nominally connected to it. That means building a robust body of documentary evidence: intra-group contracts for management services, agreements detailing how leasing activity is coordinated with the group’s core business, and any other evidence that the subsidiary cannot be separated from the group’s overall operations.

The doctrine may also extend to other common structures, for instance where one company owns the premises used by the group and leases them to other entities, or where a property business is split across several subsidiaries with staff concentrated in just one of them.

Osborne Clarke comment

The rulings are a significant correction. Applying the staffing rule mechanically produced outcomes that were hard to defend, effectively penalising businesses organised along entirely rational commercial lines.

Yet the court has left important questions open. It does not specify how much functional integration is sufficient, nor what evidence will satisfy that standard. The line between genuine and merely formal integration is set to become the next battleground between taxpayers and inspectors.

It also remains to be seen how the regional tax authorities, who retain jurisdiction over Wealth Tax and Inheritance and Gift Tax, will respond. What is already clear is that family groups with no staff that carry out leasing subsidiaries should review their position: both to identify opportunities to correct past assessments and to strengthen their documentation ahead of future tax inspections.