Build to Rent. Legal considerations in Spain

In the real estate sector, Build to Rent is understood to mean an investment in assets with the ultimate aim of obtaining income from long-term leases of the assets. The investment typically funds the acquisition, development, building, rehabilitation or adaptation of the asset, which is usually real estate.

The impact on the global economy of the COVID pandemic and the Ukraine War includes a trend in the Spanish property market, namely a rise in the demand for rented housing in lieu sales and purchases. This is most pronounced in large cities such as Madrid, Barcelona, Malaga and Valencia, and is especially notable among those aged 25-50. This segment of the property-buying public is facing high purchase prices, difficulties in generating savings and accessing bank financing.

These factors increase the numbers of those who need to or choose to rent, even in areas which simultaneously are experiencing a proliferation of housing developments and options. This increases the demand for rental residential solutions, and therefore the interest of investors in that type of project.

The EU, Spanish and state legislation enacted in relation to Build to Rent has been modified several times, and now offers a variety of structures to choose from. The main factors to be considered in choosing the type of investment structure include the nature of the asset (for example, undeveloped land, new or second-hand housing); the investment operating and maintenance costs; the tax residence of the investor; whether the investment gain is to be generated as income (rent) and/or capital gains; and finally, the exit strategy, i.e., sale of assets versus sale of the corporate structure.

Build to Rent projects are then usually set up under one of the following schemes: (i) establishment of a holding company and one or more Special Purpose Vehicles (SPVs) as asset-holding subsidiaries; or (ii) the well-known Listed Public Limited Companies for Investment in the Real Estate Market (“SOCIMI”), still booming despite their high operating costs and the 15% corporate income tax (“CIT”) rate introduced by Law 11/2021 of 9 July; (iii) Collective Investment Schemes (CIS), probably an underutilised option; and (iv) Entities Dedicated to Residential Leasing (“EDAV”) regime, which will be analysed in this article in relation to a Binding Consultation issued by the Directorate General of Taxes (“DGT”) in January 2023.

Regulatory framework

The special tax regime for EDAVs is provided for in Chapter III of Title VII of Law 27/2014, of 27 November, on Corporate Income Tax (“LIS”), which has the following requirements:

  • The EDAV’s main economic activity must be the rental of dwellings – as defined in urban rental regulations – in Spain, which include furniture, storage rooms, up to two parking spaces and other accessories.
  • The number of dwellings rented or offered for rent in each tax period must at all times be eight or more.
  • The dwellings must remain rented or offered for rent for at least three years.
  • Property development and rental activities shall be accounted separately for each property acquired or developed, with the necessary breakdown of rent for each dwelling.
  • If the EDAV carries out complementary activities, at least 55% of the income for the tax period, without considering income obtained from the sale of leased property after exceeding the minimum maintenance period, or at least 55% of the value of the entity’s assets, must generate income eligible for the tax credit provided for in Article 49(1) of LIS.
  • EDAV must have personnel and material resources dedicated exclusively to the management of housing leases.


This special regime is incompatible, except in some cases, with the simultaneous application of other regimes such as those of AIEs (Spanish or European), UTEs, venture capital entities, mining, hydrocarbon research and exploitation, international tax transparency, ETVEs, partially exempt entities, communities owning common land or shipping entities (depending on tonnage).

Taxation of EDAVs

The EDAV regime is undoubtedly attractive to investors who plan to acquire real estate which will be used for residential purposes – as described in the Urban Leases Law – for rental. However, the rental of industrial buildings and dwellings intended for tourist or seasonal rental is excluded from this special tax regime.

The EDAV regime requires the establishment or acquisition of a commercial structure, e.g., a limited liability company which acquires or holds the dwellings, the land on which the dwellings are or are built, or which owns real estate with the characteristics required by law. That entity must keep accounts as required by law.

With regard to the indirect taxation, it should be borne in mind that renting housing is an activity exempt from Value Added Tax (“VAT”).

When acquiring plots of land or homes from private individuals or second-hand homes from entrepreneurs, EDAVs must abide by the general rules applicable under the general regime and must pay Transfer Tax and Stamp Duty (“ITP”) on the transaction. SOCIMIs, on the other hand, benefit from 95% tax relief in both cases. On the other hand, when the investor undertakes housing construction work or the acquisition of plots of land from other entrepreneurs, that will be subject to VAT at rates of 10% and 21%, respectively. This indirect taxation is no more favourable for entities operating under the general regime or for SOCIMIs.

A reduced VAT rate of 4% applies to the supply of dwellings acquired by EDAVs, in accordance with the provisions of Article 91.Dos(1)(6) of VAT Law 37/1992 of 28 December 1992. The application of this reduced rate requires subsequent reduction in the CIT of the income obtained from the rental activity, which will also be discussed below.

Certain precautions should be observed before formalising the transfer of the asset. In particular, special attention should be given to some of the transactions mentioned, since their taxation will entail an impact on the entrepreneur’s profit and loss that may vary with the nature of the asset acquired, according to regulatory and doctrinal considerations:

  • First delivery of housing requires certain requirements to be met and the certificate of habitability to be in place. Otherwise, the transaction is considered a purchase of a plot of land. However, decision number 00/00972/2018/00/00/00, issued by the Second Chamber of the Central Economic-Administrative Tribunal on 21 May 2021, allowed the application of the reduced rate of 4% VAT, instead of the general rate of 21%, in a case in which the certificate of habitability was obtained after the delivery. The claimant was able to prove that the construction was completed on the date of delivery, and that there was no modification of the property between that date and the date of obtaining the certificate, with that delay being due solely to administrative reasons.
  • On the other hand, there is a distinction between a first and second delivery of the property. The first delivery is made exclusively by the developer of the property. Contrary to the provisions of Spanish legislation, the Court of Justice of the European Union (see Case C-308/16, decided by its Second Chamber on 16 November 2017, Judgment 62016CA0308), considers that a supply of housing formalised before its effective occupation may be exempt from VAT. For the EU high court, prior occupation and effective use of the property by a third party under a lease agreement signed by the developer prevails over disposition of the property by the latter, despite the fact that – strictly speaking – this would have been the first transfer of ownership. This decision highlights the lack of consistency between our national legal system and EU legal criteria.
  • Contrary to the criteria established by the TEAC and the CJEU referred to above, barely three months later the DGT issued a ruling (in binding resolution V2240-21) that (i) the first supply of the finished homes in question required having the certificate of completion and also the certificate of occupancy, as otherwise the regular 21% VAT rate was applicable instead of the reduced VAT rate; and, furthermore, (ii) that the subsequent sale of the same finished dwellings acquired from the developer is considered a second transfer, exempt from VAT, and not a first supply, even though they have not yet been occupied in any way. This is a significant difference that would entail a significant cost for the businessman, as he would not be able to pass on the VAT either in full or in part.


In addition, the EDAV regime allows eligible entities to benefit from a super-reduced VAT rate of 4% on the acquisition of dwellings, but also to apply an income tax rebate on the income obtained from renting them, as long as they are intended for the permanent residence of their occupant. This excludes the rental of other properties, such as those intended for tourist accommodation, seasonal rental or “coliving”, to name but a few types.

In this context, if the acquiring party, who is covered by the EDAV scheme and therefore has the benefit of the super-reduced VAT rate at the time of acquisition and of the IS rebate on the income obtained from the lease, does not comply with the legal requirements for maintaining the EDAV scheme, the VAT Law Regulations require the purchaser to submit a declaration or commitment to maintain the said requirements. He thereby becomes jointly and severally liable with the transferor for the differential VAT payments to the Tax Agency.

With regard to the direct taxation of EDAVs: As noted above, the special regime allows eligible entities to benefit from a 40% rebate on the gross tax liability, corresponding to the income derived from the rental of dwellings which meet the requirements described above. This rebate, covered by Article 49(1) of the LIS, was 85% until 31 December 2021, when it was modified by Law 22/2021, of 28 December on the General State Budget for the year 2022.

Please note that the EDAV scheme does not benefit from bonuses on capital gains on the sale of dwellings.

Renunciation of the regime

If the EDAV fails to comply with or abandons the scheme before expiry of the minimum period of three years of renting or offering for rent at least eight dwellings, the EDAV must pay to the Tax Agency the differential VAT payments corresponding to the sale and purchase transaction at the general rate.

In this regard, the DGT’s binding response to consultation V0171-19 deals with an increasingly frequent case, the waiver of the EDAV regime to opt for the SOCIMI regime, due to stricter rental property taxation in Spain. The central issue for the consultation was whether the taxation of the sale and purchase of the property at the super-reduced VAT rate of 4% was appropriate. The DGT concluded that the taxpayer was not obliged to pay the VAT differential up to the general rate as long as he had at least one tax period under the EDAV regime.

The same body maintains – in other consultations – that for the purposes of meeting the obligation under the SOCIMI regime for time of holding the asset, the period under the EDAV regime does not count.

Comments on the binding resolution of the DGT to the consultation V0102-23

On 31 January 2023, the DGT issued its ruling on a question raised by an entity engaged in the leasing of several business premises and industrial warehouses and more than eight dwellings, and which was considering opting for the special EDAV tax regime. Although the value of its dwellings accounted for more than 55% of its assets, the rent received from the dwellings was less than 55% of the total.

The issues raised by the taxpayer covered both CIT and VAT rules:

  • Firstly, regarding eligibility for and maintenance of the EDAV regime, the question arises as to whether can be regarded for the purposes of calculating the value of the entity’s assets generating income eligible for the CIT rebate, leased properties such as premises, which have a certificate of occupancy, as well as other properties under construction without, as yet, a final construction certificate or certificate of occupancy.

The DGT rejected the treatment proposed by the taxpayer, and specified that each property leased by the EDAV must have an urban classification established in article 48 of the LIS, and that its purpose must be the occupant’s need for permanent residence, as referred to above. As for the dwellings under construction, the DGT did not accept that they should be considered as assets of the entity for the purposes of calculating the income generated under the rental regime.

  • In regards to VAT, the consultation sought to validate that construction work carried out by builders and promoted by the taxpayer would be taxed at 4%, assuming that the latter had availed himself of the EDAV scheme, or whether instead the rate of 10% should be applied.

In this regard, firstly, the DGT confirmed that only transactions involving the acquisition of dwellings by entities covered by Article 91.Dos(1)(6) of the LIVA will be assessed VAT at 4%. The DGT also emphasised the joint and several liability of the acquirer and transferor of these assets before the Tax Agency, in accordance with the provisions of Article 26 of the VAT Regulations. Also noteworthy is that cases of delivery of dwellings by entities which do not meet the requirements for the special regime, nonetheless may enjoy the 4% VAT rate to the extent that the economic motivation and intention of the acquiring entity to use the dwellings for renting is evidenced by objective elements. This ruled out the use of the option when based solely on a tax benefit.

The DGT concluded by clarifying that the VAT rate applicable to the supply of buildings or parts thereof suitable for use as dwellings is 10%, including annexes such as garages (up to two), storage rooms and other accessories transferred jointly, but not business premises. It was also clarified that buildings intended for demolition prior to a new urban development would not be an exempt transaction, but rather subject to 10% VAT.


The Build to Rent sector in general, and particularly the EDAV structures, have proliferated in recent years despite the regulatory requirements attached to them. However, several factors suggest the possibility of a decline in the popularity of the EDAV regime, including the incessant tightening of applicable conditions, current regulations to standardise compliance with conditions when opting for other special regimes and the forthcoming enactment of the new Housing Law, which is still being processed in the Spanish Congress of Deputies.

Notwithstanding the foregoing, Seegman will consciously monitor the forthcoming changes affecting this field, with the aim of providing the best advice to our clients when implementing Build to Rent projects.

This article contains information of a general nature and cannot be considered as legal advice. Accordingly, any action taken on the basis of this article should be preceded by appropriate professional advice.

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