The Supreme Court confirms the exemption of property tax (IBI) for rented properties

Entities under the special tax regime of Law 49/2002

After several years of uncertainty and "suffering" from the restrictive interpretation of some municipalities (with the Barcelona City Council being the "flag bearer of the cause"), the Supreme Court has ruled and confirmed that properties rented by entities to which the special tax regime of Law 49/2002 on "patronage" applies will be exempt from property tax (IBI).

Looking back, we must remember that this situation of uncertainty began with the ruling of the Court of Justice of the European Union (hereinafter CJEU) on June 27, 2017 (C-74/16). This ruling, on the other hand, marked "the beginning of the end" of the exemption from the ICIO for religious entities.

In this 2017 ruling, the CJEU acknowledged that this exemption (based on the Spanish Church-State Agreement of January 3, 1979) could contravene Article 107.1 of the Treaty on the Functioning of the European Union (TFEU). Therefore, the conditions that had to be met for this exemption not to be considered state aid contrary to EU competition law were established.

As we announced at the time, the CJEU's decision to consider this exemption as potential state aid was a risk and could lead certain administrations to attempt to apply this doctrine to other exemptions, which is what happened. Some local administrations (such as the Barcelona City Council), despite the fact that the Supreme Court in 2014 and 2015 rulings had declared the IBI exemption for rented properties, and under the interpretation of the CJEU's 2017 ruling, began issuing IBI assessments for these rented properties (denying the previously recognized exemption and ruling against the appeals filed against them) on the grounds that the rental of properties was an economic exploitation not covered by Article 7 of Law 49/2002 and, consequently, a non-exempt economic activity (Corporate Tax exemption of economic activities that conditions all subsequent exemptions in local taxes, so by denying the exemption as an economic activity, the exemptions in local taxes would "fall").

It was of little use to argue that Article 3 of Law 49/2002 explicitly states that leasing should NOT be considered an economic activity or, as the Supreme Court itself acknowledges in its ruling, the manifest intention of Law 49/2002 (as recognized in its explanatory memorandum) was to "overcome" the previous regulation contained in Law 30/1994 and that the limitations that local administrations sought to apply were contrary not only to the law itself but also to the legislator's intent.

Some municipalities, following the 2017 CJEU ruling, even assessed prior non-prescribed periods and, year after year, have been issuing the tax without "listening to reason."

Well, this ends here, as in this ruling (this time written with impeccable clarity and forcefulness), the Supreme Court has recognized that:

• The rental of properties cannot be considered an economic activity. 
• Since it is not considered an economic activity, it CANNOT be a non-exempt economic activity for Corporate Tax purposes—a requirement established in the regulations for a property to be subject to and not exempt from IBI.
•  The activity carried out by the tenant on the property is irrelevant. 
• And most importantly… this exemption (unlike what was established in the previously mentioned 2017 CJEU ruling) can under no circumstances be considered state aid contrary to Article 107.1 of the TFEU. In fact, the Supreme Court expressly states that:

"Without this Court having any doubts that the case we are judging is in accordance with the European Union State aid regime."

"The impossibility of attributing selective character to the aforementioned tax exemption excludes the possibility that it could distort or threaten to distort competition and, consequently, the recognition of such exemption as state aid."

• This ruling, in short, confirms and reaffirms the recognition of the exemption established in the Supreme Court rulings of April 4, 2014, or December 10, 2015, so it should be considered binding for different jurisdictions and administrations in applying the IBI exemption for rented properties.

In our view, this ruling is not only important for the case of rented properties but also cuts off "potential intentions" of the Administration to consider that, despite the exemption provided for in the regulations and for "competition law," a property used for economic activity (such as a teaching center, a nursing home, etc.) could contravene the TFEU and should result in the non-exemption of local taxes derived from that activity (IBI, IAE, municipal capital gains, etc.).

In fact, the Supreme Court (harshly and forcefully) highlights the significant errors made by the City Council in its interpretative drift and its attempt to limit the application of the IBI exemption for rented properties… To even preventively, as we have anticipated, indicate that it is unlikely the CJEU would validate a thesis like the one defended by the City Council.

This ruling undoubtedly gives us grounds to file new submissions in all those proceedings we have with the different municipalities that followed this "twisted" interpretation… and we hope and wish that they unblock all the proceedings we had kept open pending this long-awaited ruling and, above all, proceed to return the thousands of euros they have improperly collected from all these non-profit entities that apply the special tax regime of Law 49/2002 (among which, we must remember, are also religious congregations or canonical foundations and associations—entities of the Church-State Agreements of January 3, 1979, which, by applying the Ninth Additional Provision of Law 49/2002, can apply this tax regime—although with different requirements between the entities of Articles IV and V of the mentioned Agreement).

We remain at your disposal to clarify the content of the ruling and, if you are an affected entity and need help with this task, to "recover what belongs to you" and should not have been paid.