How is tax paid on a holiday home in the Canary Islands?
05/07/2023Understanding the tax implications can cause some anxiety amongst holiday rental owners, particularly when dealing with tax administration. Fortunately, the Canary Islands offer certain advantages. Unlike other Spanish regions like Barcelona, Madrid or the Balearic Islands, the Canaries do not impose a specific tourist tax on holiday rentals. However, this does not make you from tax obligations.
Rental income from holiday homes is considered property income and, therefore, is subject to Personal Income Tax (IRPF), just like the rest of Spain. Furthermore, in the Canaries, the Canary Islands General Indirect Tax (IGIC), a region-specific tax, is applied.
But how do these taxes affect your holiday rental activity? In the following sections, we will explain in detail how these taxes are applied and provide tips for managing them as efficiently as possible.
How do residents in Spain tax income from holiday homes in the IRPF?
As a holiday homeowner, it's crucial to understand how the income generated from your property is taxed in Personal Income Tax (IRPF). This tax, which all fiscal residents in Spain must file annually, will include the profits made from renting your holiday property. However, the way these earnings are classified can vary.
Most of the time, these earnings will be considered as income from property. These types of earnings are, in essence, the profits made from renting real estate. This is the most common case and will apply to most holiday homeowners.
However, if you've hired at least one full-time person (for instance, if you have a reception service at your property) or if you offer services typical of the hotel industry (like regular cleaning, bed linen changes, meals or leisure activities), your income should be declared as income from economic activities.
It's important to clarify that "regular cleaning" is only considered a hotel service if it's carried out during the guest's stay, not if it's done at the arrival and departure of each new client, or when it refers to cleaning common areas of the building.
Similarly, regular changing of sheets and towels is not considered a service of the hotel industry, unless it's carried out during the client's stay.
What income must be declared and what expenses are deductible?
When it comes to declaring your holiday home income in the IRPF, it's essential to include the total income earned from renting your property. This figure, known as gross income, can be reduced by the expenses incurred during its generation.
The expenses that you can deduct include:
- Maintenance or repair expenses (but not improvements)
- Mortgage interest
- Community charges
- Costs of services like lighting, electricity, internet and other supplies
- Property Tax (IBI)
- Municipal garbage fees
- Agency commissions
- Basically, any expense directly related to the rental of the accommodation can be deducted. However, it's important to remember that you can only deduct these expenses during the time that the property was rented.
For example, if your holiday home is rented during the summer months, you cannot deduct the entire year's electricity costs. Nor can you deduct the total Property Tax, as you must prorate it based on the months corresponding to the rental.
Finally, during the time that the property is not rented, if you own a second home, it will continue to be subject to IRPF as income from property. Therefore, you must pay tax based on the property's cadastral value.
How is income from holiday homes taxed in the IGIC?
In the Canary Islands, VAT (Value Added Tax) is not applied, but an alternative tax known as IGIC (Canary Islands General Indirect Tax) is. Like VAT, this tax applies to the consumption of goods and services.
The IGIC is almost identical to VAT, except that the rates are considerably lower, reaching 0% in some cases.
However, unlike other regions of Spain, like Galicia, in the Canaries all tourist accommodations must pay a 7% IGIC. This applies regardless of whether services considered typical of the hotel industry are offered.
In addition, in the Canaries, there is a special tax regime for small entrepreneurs, known as Special Regime for Small Businesses and Professionals (REPEP). If your annual income from all your activities does not exceed 30,000 euros, you can opt for this regime, which exempts you from charging and paying IGIC. However, it also means that you cannot deduct the IGIC that you have paid on your expenses.
This is particularly relevant for holiday homeowners who do not have many properties and whose annual income is below the REPEP threshold. In these cases, the REPEP regime can greatly simplify tax and accounting management. However, every situation is unique, so it's important to get professional advice to make the decision that suits you best based on your personal circumstances.
How is income from holiday homes taxed for non-residents?
If you're a non-resident owning and operating a holiday home in the Canaries, it's crucial to understand your tax obligations.Your tax obligations will hinge on your fiscal residence, resulting in two potential scenarios you'll need to navigate:
If you are a fiscal resident in the European Union, Iceland or Norway.
If you are a fiscal resident in any other country.
In both scenarios, the income you earn from renting is treated similarly to income earned by residents in Spain. However, the tax rates are different:
For residents of the European Union, Iceland and Norway, a tax rate of 19% applies to rental income.
If you're not a tax resident in the European Union, Iceland or Norway, a tax rate of 24% applies to rental income. It's important to know that you cannot deduct the expenses incurred to obtain the net yields. This means that you'll pay taxes on gross income, i.e., before deducting any expense. Under these circumstances, there can be a more significant tax impact than expected. This is the case for many Britons who own a property in the Canaries.
In this situation, the convenient option is to work with a holiday rental management agency.
Additionally, all non-residents must pay taxes on the income generated by the non-rented days, and this is done through an annual declaration.
However, there would be a different case if these people operate in a business activity. In this last case, the regulations can vary, so we recommend consulting with a tax expert.
Maximise your earnings and minimise your worries with Pambnb
Managing a holiday rental property in the Canaries can seem challenging, but knowing the tax regulations can help you operate with confidence and efficiency. As an owner, it's crucial to understand how Personal Income Tax (IRPF) and Canary Islands General Indirect Tax (IGIC) apply to your rental income.
If you're not a fiscal resident, especially outside of the EU, Iceland or Norway, the tax situation can be even more complex. Here, partnering with a holiday rental management agency, like Pambnb, can greatly simplify the process, and help you comply with tax regulations.
At Pambnb, we not only take care of the full management of your property, but we also collaborate with expert advisors to ensure all tax responsibilities are handled correctly. Our goal is to let you enjoy the profitability of your property without the stress that can come with fulfilling tax and administrative obligations.
So, if you want to enjoy the peace of mind of having your property in the Canaries managed by professionals, while optimising your rental income, don't hesitate to get in touch with us at Pambnb. We are here to help you find the best solution for your needs.
