Legal and Fiscal Obligations for Holiday Rentals in the Canary Islands

The legal and fiscal regulation of holiday homes is a complex issue that depends on various factors, including the property's location, the type of use, and the rental duration. Let's briefly examine the legal and fiscal obligations that resident individual owners must comply with, perhaps the most common case and the one that generates the most doubts.

Mandatory Prior Authorizations

To operate a holiday home in the Canary Islands, it will be essential to obtain an authorization from the corresponding Island Council (Cabildo Insular). Furthermore, these bodies will be responsible for establishing inspection plans to guarantee compliance with the regulations. Supervision of responsible declarations related to tourism will also be reinforced, with the participation of town councils and island councils.

On the other hand, a responsible declaration of commencement of holiday home activity must be submitted for registration in the General Tourist Registry of the Directorate General for Planning, Training and Tourism Promotion, under the Ministry of Tourism and Employment of the Government of the Canary Islands. This tourist license is indispensable for operating legally and avoiding penalties.

In some municipalities, prior municipal authorization might also be necessary to allocate a property for holiday rentals.

How it is Taxed under Personal Income Tax (IRPF)

A lease for a use other than housing is considered to be any lease that, falling on a building, has as its primary purpose a use other than satisfying the permanent housing needs of the tenant; this is the case of tourist apartment rentals.

When you rent a tourist apartment, you can offer a series of complementary services.

If the services you provide are typical of the hotel industry, the income you obtain from the rental is considered income from economic activities.

These services would include, among others:

• Permanent and continuous reception and attention to the client in a designated space.

• Periodic cleaning of the property and accommodation.

• Periodic change of bed linen and towels.

• Making other services available to the client (laundry, luggage storage, newspapers, reservations, etc.) and, sometimes, providing food and beverage services.

Conversely, the following are not considered complementary services typical of the hotel industry, and therefore you are carrying out a tourist rental when you provide services such as:

• Cleaning the apartment upon arrival and departure of each tenant's contracted period.

• Changing linen in the apartment upon arrival and departure of each tenant's contracted period.

• Cleaning the common areas of the building (hallway, stairs, and elevators) as well as the urbanization where it is located (green areas, access doors, sidewalks, and streets).

• Technical assistance and maintenance services for eventual plumbing, electrical, glass, blind, locksmith, and appliance repairs.  

Income derived from tourist rentals is, in general, considered income from real estate capital.

Notwithstanding the above, when to carry out the activity you have, at least, one employee with a full-time employment contract, the income you obtain from the tourist rental is considered income from economic activities.

When declaring it in your IRPF, the total income obtained from renting your property (gross income) will be reduced by the amount of expenses incurred in obtaining it.

Among the expenses you can deduct are included:

• Conservation or repair expenses (but not improvements).

• Mortgage interest.

• Community expenses.

• Costs of services such as electricity, internet, and other supplies.

• Property Tax (IBI).

• Municipal garbage fees.

• Agency commissions.

Basically, any expense that is directly related to the rental of the accommodation may be deductible. However, it is important to remember that you can only deduct these expenses during the time the property was rented.  

For example, if your holiday home is rented during the summer months, you cannot deduct the electricity costs for the entire year. Nor can you deduct the entire IBI, as you must prorate it based on the months corresponding to the rental.

Finally, during the time the property is not rented, if you own a second home, it will continue to be subject to IRPF as income from real estate capital. Therefore, you must pay taxes based on the cadastral value of the property.

Obligations Regarding the Canary Islands General Indirect Tax (IGIC)

Registro: Es obligatorio darse de alta en la Agencia Tributaria Canaria mediante el Modelo Registration: It is mandatory to register with the Canary Islands Tax Agency using Form 400, even if the rental is exempt (as in the case of long-term rentals). For holiday rentals, the heading is 1685 "Extra-hotel tourist accommodation". The deadline for registration was December 31, 2024, so if it has not been done, it must be done as soon as possible to avoid penalties.

Settlement: Holiday rentals are subject to IGIC, currently at the general rate of 7%. Invoices with IGIC must be issued, and periodic returns must be filed (quarterly with Form 420, and an annual summary with Form 425 if you are not under the Special Regime for Small Businesses - REPEP).

REPEP: If the annual turnover is less than 30,000 euros and other requirements are met, you can opt for the REPEP, which simplifies some obligations, but still requires the submission of Form 425 at the end of the year.

It is important to mention that if the taxable person receives service invoices from professionals not resident in the Canary Islands, the taxable person is obliged to pay IGIC on behalf of this professional. This is called the reverse charge and, in general, has no impact as a deducted and a passed-on IGIC are declared simultaneously, with the final result being zero. This is what happens with platforms that send us clients (e.g., Airbnb or Booking). These platforms are generally located outside the Canary Islands, and the operation is as follows:

• We receive the net amount from the clients they have sent us in our bank account, deducting the commission. Example: the net amount deposited in the bank is €100. The total sales are €120. Commission for services provided: €20.

• We must declare €120 as sales and pay IGIC of €7.85 (€120 / 1.07), since the sale already includes IGIC.

• Apply the reverse charge for an amount of €0.57 (on the €20 commission).

Always remember to keep a careful record of your income and expenses related to the holiday rental to facilitate your tax returns and ensure correct compliance with current regulations.

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