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Landlords Do Not Have to Pay the Rent Reductions Agreed by Covid-19

The Accounting and Auditing Institute (hereinafter ICAC) has confirmed in a query that literally analyzes:

"The accounting treatment of the rent reductions agreed in a business premises operating lease contract due to the extraordinary measures adopted by the Government for owners of rental properties",

that the owners will not have to pay taxes for the income not received due to the reductions agreed in the rental contracts derived from COVID-19.

And it is that it was possible to interpret that the forgiveness or rent reductions that had been agreed because of COVID-19 would not mean less income (for landlords) and less expense (for tenants), since their effect It should be distributed over the entire years of the contract.

This possible interpretation was supported by two consultations published by the ICAC in 2011 and 2013. The first in relation to an initial grace period in a rental contract and the second, referring to a contract with progressive annual rents. And what these inquiries indicated is that the reductions in rental income should be distributed throughout the duration of the contract.

Obviously, these two consultations did not contemplate an extraordinary situation of paralysis of economic activity such as that experienced with COVID, and their strict application meant that lessors had to account for and pay taxes in 2020 for a large part of these reductions granted, despite the not having obtained these rental income, which mostly happened to be considered a lower future income. And like the other side of the coin, tenants could not account for these rent reductions in this year 2020, since a large part should also be accounted for as a lower amount in future years.

This supposed an obvious damage, especially to the lessors, since it forced them to pay taxes in the short term for rents that had been totally or partially forgiven.

The claim that was made wanted to achieve a change in this consideration so that the ICAC clarified that when the rent reductions were the result of a legal norm, a cause previously provided in the initial contract, or finally also, of a specific agreement between the landlord and tenant due to a totally extraordinary situation (such as COVID-19), these reductions would have full and immediate effect on the results of the year.

This is basically what the IASB has already done, a body that issues international accounting standards (IFRS) in May 2020, but which few companies in Spain can apply.

The proposal sought what has finally been achieved: that the income of the leasing company for 2020 is immediately reduced and that income that has not been received will not be taxed. And that in parallel the lessee can also immediately reduce their losses in the affected years.

Although during 2020 the ICAC did not publish the expected consultation (for which reason many companies, due to prudence, were forced to provisionally close their financial statements with higher income and expense figures than those actually produced), finally, the ICAC has published the response to this query confirming now that the affected leasing companies and tenants will be able to redo their accounting at the close of fiscal year 2020 to incorporate this new criterion in their accounts.


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Salvador Balcells i Iranzo's picture

One of the things Mr. Balcells like most about his job is when you get a safe, legal and fair tax situation for the sake of the taxpayer's tranquility and economy, both in previous structuring and planning, and when certain criteria have to be defended before Tax administration.

As a lawyer, he always try to put himself in the place of the one who asks for advice, so that all the options or alternatives that are considered as solutions, are those that would adopt at a personal level if the interested party is himself.