Rental income reductions in the context of COVID-19

Due to the difficult circumstances involved in sustaining structural costs in a context of stagnating, or severely reduced, activity and the uncertainty of subsequent recovery, many tenants, in order to maintain the viability of their businesses, are asking their landlords to take measures aimed at maintaining the viability of their businesses that involve the reduction, suspension or deferment of the payment of rent. In this briefing, we will refer to cases of total or partial waiver of rent as “reductions” (“bonificaciones”). Deferral cases are treated differently from the cases referred to above.

Implications for corporate income tax

In general terms, it must be assumed that any reduction in rent can be considered a gift (“liberalidad”) insofar as the parties could be departing from an agreement that for them is legally binding (Article 1091 of the Civil Code (“CC”). Although such a reduction will not normally entail an expense for the landlord, but rather a reduction in income, this does not change its categorisation as a gift.

However, given that the aforementioned Article 1091 of the CC establishes that the obligations arising from the contracts “must be fulfilled in accordance with them”, it will first be necessary to determine whether the lease contracts include clauses of force majeure or others that can be understood to have been activated with the current situation, in which case it will be necessary to comply with what was agreed by the parties in those contracts. In other words, it would not be possible in such cases to analyse the tax deductibility of the gift since, given that such a clause has been duly agreed by the parties at the time of signing the lease, there would not be any gift, but rather strict compliance with the contract.

Please see the attached PDF for the entire Legal briefing.