The Supreme Court Strengthens the 95% ISD Reduction for Rental Businesses: Proving the Employment Contract Is Enough, Without Justifying Its Economic Necessity

The recent Supreme Court judgment of 14 July 2025 marks a turning point in the interpretation of property rental as an economic activity for the purposes of the Inheritance and Gift Tax (ISD). The High Court concludes that it is not necessary to justify the employee’s workload; it is enough to formally prove that the employee has been hired full-time in order to benefit from the 95% family business reduction.

At Vicens Advisors, tax advisers in Manacor and Mallorca, we analyse the practical impact of this key judgment for wealth planning in families with real estate activity.

Facts of the case: property rental in a family business

The case decided by the Supreme Court arises from an acquisition mortis causa in 2013 of shares in a company engaged in property rental. The inspectorate denied the 99% tax reduction provided for in the regional rules of Aragon, on the grounds that:

• Part of the management was subcontracted.
• The employee’s workload was minimal.
• The tasks were merely administrative or shared with other companies of the group.

This inspection practice is common in many autonomous regions, including the Balearic Islands, and creates considerable legal uncertainty for heirs who seek to apply the family business tax benefits.

Supreme Court doctrine: form prevails over economic assessment

The Supreme Court sets out cassation doctrine in the following terms:

“To apply the reduction provided for in Article 20.2.c) of the ISD Act, in relation to the activity of property rental, it is sufficient to prove compliance with the requirements laid down in Article 27.2 of the Personal Income Tax (IRPF) Act, without it being necessary to justify the hiring […] from an economic point of view”.

The Supreme Court also stresses that, where the Administration considers the hiring to be fictitious or simulated, it must apply the figure of simulation under Article 16 of the General Tax Act (Ley General Tributaria, LGT), expressly stating the reasons for its legal characterisation. From this judgment we can draw the following conclusions:

🔹 Key 1: It is not permissible to demand an “economic justification” as to whether the employee has a sufficient workload.

🔹 Key 2: What matters is that there is a person hired full-time and premises allocated to the activity, without further evaluative requirements.

🔹 Key 3: The inspectorate cannot suggest simulation without expressly applying Article 16 of the LGT, which requires a reasoned declaration identifying the simulated transaction.

Legal certainty and protection of the family business

The Supreme Court invokes a fundamental principle: the purpose of the rule is to favour the continuity of family businesses and to prevent their liquidation after a succession. Therefore:

• A restrictive interpretation must not be applied, nor requirements introduced that are not provided for by law.
• The genuine and formal hiring of the employee is sufficient, without any need to prove productivity or intensity of work.

How does this affect the Balearic Islands?

In the Balearic context, where many families own companies engaged in rental, this judgment:

Strengthens the possibility of applying the 95% reduction in the Inheritance and Gift Tax if the requirements of Article 27.2 of the IRPF Act (LIRPF) are formally met.

Does not eliminate the risk of inspection, but it limits the powers of the tax authorities by requiring solid evidence if they wish to allege simulation.

And what about Wealth Tax (IP)?

Although the judgment expressly refers to the Inheritance and Gift Tax, the legislative link between the two taxes (Art. 4.Ocho of Law 19/1991 on Wealth Tax) supports the argument that the same criterion should be valid for the exemption in Wealth Tax, which also applies to family entities engaged in rental.

Conclusion

The Supreme Court judgment of 14 July 2025 is a major step forward for taxpayers’ legal certainty and clarifies one of the most contentious aspects of applying the tax benefits for family businesses: it is sufficient to meet the formal requirements, without any need to justify the employee’s necessity on economic grounds.

At Vicens Advisors, as experts in wealth and succession taxation in Mallorca, we recommend reviewing family business structures and properly documenting the hiring and the allocation of the premises in order to maximise the tax benefits.

For an overview of how to reorganise a family business under a parent company, see our tax guide to family holding companies in Spain.