Fiscal implications associated with the free use of a property

Legal and Tax advice from Fernando Aliaga

From a legal perspective, what does the free use of a property refer to? Within a family circle, and especially between parents and children, the possibility of using a family member’s property for free or in exchange for simply paying the costs of the utilities is a very common practice.

The Spanish Civil Code establishes several different legal figures regarding the right of use, the loaning of assets, the assignment of rights, usufruct and bare-ownership and also establishes a legal figure called the “comodato” which loosely translates as a loan for use agreement.

The “comodato” is characterized by being a free arrangement without any consideration being received in exchange for the use of the asset lent. The person who loans the asset retains the ownership whilst the beneficiary of the lent object receives its use but not its fruits. Normally the rights concerning the loan for use agreement are passed on to the heirs of the beneficiary unless the agreement has been constituted specifically in favour of the original beneficiary personally. The beneficiary of the loan for use agreement has the liability to cover the cost of the ordinary expense necessary to maintain and conserve in a good state of maintenance the object of the loan.

The loan for use arrangement does not constitute a real right and as such cannot be registered in land registry against the property and is not equivalent to a usufruct nor a right of habitation. It normally refers to the mere loan of a property with an obligatory nature and which is constituted by a contract which cannot give any rights over the benefits of the object lent. It cannot be confused with a rental contract as a rental is characterized by the existence of a consideration that the owner receives in exchange for the rental of the property.

What fiscal considerations are associated with a loan for use agreement?

Could it be considered as a gift from a fiscal perspective? Although the General Directorate of Taxation has in the past considered the loan for use as a gift, at present this position cannot be maintained. The comodato is a specific form of a loan but from a fiscal point of view it cannot be considered that the wealth of the beneficiary of a loan for use agreement increases as a consequence of the loan which is the fundamental characteristic of a gift. The beneficiary receives the mere right to use an object and does not even receive the right to benefit from the fruits of the object lent and as such, it cannot be understood that his/her patrimonial wealth increases. At the same time, the making of a gift also implies that the grantor’s patrimony decreases which is not the case when a loan for use agreement is constituted.

Are there any other fiscal considerations that the beneficiary of the loan for use agreement should be aware of?

In principle there are no other fiscal implications associated with a loan for use as there are no nominal income tax implications nor any taxation by stamp duty on the actual constitution of the agreement.

Are there any fiscal considerations that affect the owner of the object lent?

Article 6.5 of the Income Tax Statute establishes that the providing of services or assets that could generate income is presumed to be remunerated unless there is proof to the contrary. How can one prove that there is no remuneration associated with a loan for use agreement? The best way of evidencing the free nature of the loan for use agreement is to document its constitution in a deed granted before the notary which regulates the terms and conditions concerning the agreement but this is not a common practice due to the cost involved.