Renting a Flat as a Home or an Office: How VAT (and Withholding Tax) Changes

Renting out the very same flat can trigger completely different tax obligations depending on what it’s used for: a primary residence, or business premises for an economic activity. The difference isn’t cosmetic — VAT (and, where applicable, personal income tax) change from top to bottom. Many self-employed professionals and small businesses are caught off guard when they rent a flat to set up their office, or when they lease one they own to a professional. This guide clarifies which exemption applies, why opting out of that exemption isn’t always possible, and when withholding tax comes into play.

Renting a Home: A VAT Exemption You Can’t Opt Out Of

Leasing a property for use exclusively as a residence is exempt from VAT. The landlord doesn’t charge VAT on the rent, and in exchange, can’t deduct the VAT paid on expenses tied to that property (renovations, furniture, management fees). It’s a “closed” exemption: unlike other property-related VAT exemptions — such as the one on second and subsequent transfers of buildings — landlords cannot opt out of the residential-lease exemption, even if the tenant is a business or professional entitled to deduct VAT. Spanish VAT law reserves the option to opt out for certain transactions involving land and buildings, not for residential leases, so neither landlord nor tenant can agree to apply VAT to a rental that the law treats as housing.

The nuance appears when the home is used, wholly or partly, for an economic activity — for example, a self-employed professional who rents a flat and uses part of it as an office, or a company that leases a flat to set up its premises there. In that case, the property is no longer “used exclusively as a residence,” and the transaction stops being exempt for the proportion (or all) of the professional use, with VAT charged at the standard rate. It’s worth spelling this out in the lease from the outset, since the declared use determines the tax treatment of the entire rental relationship, not just the first invoice.

Renting an Office or Commercial Unit: 21% VAT and Withholding Tax

When a property is leased as commercial premises, an office, or a warehouse for an economic activity, the residential exemption doesn’t apply: the landlord must charge VAT at the standard rate (21%) on every invoice, and that VAT is deductible for the tenant if the premises are used for their business. Alongside VAT comes personal income tax: if the tenant is a business or professional paying rent on premises used for their activity, they’re required to withhold tax on account of personal income tax (or corporate tax, if the landlord is a company) from the rent amount, and pay it in quarterly via Form 115, as well as providing the landlord with the corresponding annual withholding certificate.

This obligation falls on whoever pays the rent, not whoever collects it: it’s the tenant — the company or self-employed professional — who withholds, declares, and pays the tax authorities, while the landlord receives the rent already reduced by that withholding, which they then deduct on their own tax return. The regulations do provide a few exceptions to this withholding obligation (for instance, when the landlord is exempt from withholding due to their legal status, or when the annual amount paid to that landlord is small), so it’s worth checking case by case rather than assuming Form 115 is always required.

Common Mistakes When Mixing Housing and Business Use

The most frequent mistake is invoicing an office rental as if it were a home rental (without VAT) for convenience — something that can lead to back payments and interest if the tax authorities review the transaction. The opposite mistake is just as common: charging VAT on a genuine home rental, which the tenant won’t be able to deduct because the exemption applies by law, regardless of what the invoice says. It’s also common to forget to withhold tax under Form 115 when a company rents commercial premises, or to fail to notify the tax authorities when a property’s use changes from residential to commercial or vice versa — something that affects both the applicable VAT and the deductibility of expenses such as property tax, community fees, or utilities.

At Zythos Business, we help self-employed professionals and small businesses navigate exactly this kind of decision, where the same lease agreement can carry very different tax implications depending on how it’s drafted and declared. We review the property’s actual use, work out whether VAT, withholding tax, or both apply, and make sure invoices, Form 115, and quarterly returns reflect the correct situation from the very first receipt — avoiding surprises down the road if the authorities take a closer look.