Global minimum tax and rental property businesses

Law 7/2024 of 20 December, which establishes a top-up tax to ensure a global minimum level of 15% tax for multinational enterprise (MNE) groups and large domestic groups, was published in Spain’s Official State Gazette (BOE) on 21 December 2024 (“Law”), following its final approval in Parliament (Cortes Generales). This Law transposes Council Directive (EU) 2022/2523 and is part of the OECD’s Pillar Two Directive. It has retroactive effect for tax periods starting on or after 1 January 2024.

Pillar Two aims to ensure that MNEs pay a minimum effective taxation of 15% in all jurisdictions in which they have a presence. This global minimum taxation is an important innovation in our international tax system. Its worldwide scope is what makes it complex as it creates a uniform regulatory framework that overcomes the differences between tax systems. Therefore, the Pillar Two rules contain a unique methodology to calculate the effective tax rate applicable to all jurisdictions.

As it is a novel regulation, we consider it helpful to analyse its compatibility with the particularities of the special Spanish tax regimes, in particular with the special regime applicable to rental property businesses (“EDAV” – Spanish acronym).

Reasoning behind the Law

Before analysing the Law in relation to the EDAV regime, the following should be borne in mind regarding the global minimum tax:

1. The effective tax rate (“ETR”) must be equal to or greater than 15%. The Law establishes mechanisms to levy a top-up tax on the difference between the ETR and the 15% minimum threshold.
2. There are three types of top-up tax: a domestic minimum top-up tax, an income inclusion rule and an undertaxed profits rule. The domestic top-up tax is relevant for the purposes of this briefing, as it relates to the effective taxation of Spanish constituent entities.
3. The global minimum tax excludes from the tax base of the top-up tax an amount equal to 5% of the payroll costs and tangible assets of the constituent entities located in the corresponding jurisdiction, as they are considered as substance-based income (“SBIE”). However, due to an unclear decision by the OECD Inclusive Framework in designing Pillar Two, property intended for sale, rental or investment should not be calculated as SBIE.

EDAV domestic regime

Entities located in Spain whose main economic activity is residential property rentals and have at least eight properties that have been rented or offered for rent for at least three years, may opt for the EDAV tax regime. These entities may also carry out ancillary activities, provided they do not generate more than 45% of their income for a given tax period.

The tax benefit of the EDAV is a 40% corporate tax relief on the net income received from its rental activities (“Discount”).

EDAV regime and Pillar Two

The special corporate tax regime applicable to the EDAV could result in an ETR below the national top-up tax threshold. The application of the Discount results in a “discounted” covered tax figure which, when divided by the total amount of GloBE income, could result in an effective tax rate in Spain of less than 15%. In fact, the general 25% Spanish corporate tax rate that would, in principle, apply to the EDAV could be reduced to below the 15% ETR as a result of the Discount.

Additionally, given the nature of their tangible assets, EDAVs are unlikely to have a relevant SBIE that would allow them to reduce the top-up tax. The SBIE of an EDAV will mainly consist of the payroll costs of its workers, since the rental properties would be excluded from its calculation.

This is based on the fact that the Discount is a non-qualified refundable tax credit”, as otherwise it could generate different ETRs and, consequently, have a greater or lesser impact on determining any top-up tax.

Given all of the above, it is clear that implementing Pillar Two will require that EDAVs, like other entities subject to special Spanish tax regimes, pay special attention to how their direct taxation incentives affect compliance with the global minimum tax requirements. In particular, and as mentioned, they will need to pay careful attention to (i) their ancillary activities and (ii) managing their payroll costs.