The Supreme Court relaxes the employee requirement for rental companies in family groups: a step forward, with caveats

Supreme Court judgments (STS) 637/2026 of February 17 (appeal no. 1196/2024), 640/2026 of February 19 (appeal no. 1326/2024), and 874/2026 of February 20.

One of the most recurrent issues in tax planning for family businesses concerns the full-time employee requirement laid down in Article 27.2 of the Personal Income Tax Law (LIRPF)PDF, which must be met for the leasing of real estate to be treated as an economic activity. This requirement is decisive for the purposes of the exemption under the Wealth Tax (IP) (Article 4.Eight.Two of the Wealth Tax Law, LIP)PDF and the 95% reduction under the Inheritance and Gift Tax (ISD) (Article 20.6 of the Inheritance and Gift Tax Law, LISD)PDF, two pillars on which much of the favorable tax treatment of the transfer of family businesses rests.

In three judgments handed down in February 2026—STS 167/2026PDF of February 17 (ECLI:ES:TS:2026:637, appeal no. 1196/2024), STS 186/2026PDF of February 19 (ECLI:ES:TS:2026:640, appeal no. 1326/2024), and STS 874/2026 of February 20—the Supreme Court has taken a significant step by accepting that the employee requirement may be deemed met when the worker is employed by another company in the group, and not necessarily by the rental company itself. However, as we will see, the case law laid down introduces a condition—“functional integration”—whose practical scope is far from clear.

The facts: a family agricultural group

All three judgments decide the same case. In December 2014, a married couple gifted to their children shares (participaciones) in ABM Corporación Empresarial, S.L., the holding company of a family group operating in the agricultural sector. One of the group’s subsidiaries, Microbell, S.L., was engaged in leasing rural land without any employees of its own; however, those leases were managed using the human and material resources of the group as a whole, which had administrative, technical, and finance departments, full-time staff, and resources shared among several companies.

The Murcia tax authorities denied the reduction under Article 20.6 LISD in respect of the shares in Microbell, on the grounds that the company did not carry on an economic activity because it failed to meet the employee requirement. The consequence was a proportional reduction in the scope of the exemption—from 100% to 74.67%—since the holding company’s interest in the rental company was treated as a non-business asset. Both the Regional Economic-Administrative Court (TEAR) of Murcia and the High Court of Justice (TSJ) of Murcia upheld the tax assessment, holding that the requirement in Article 27.2 LIRPF had to be met by each company on a stand-alone basis.

The Supreme Court’s case law: a conditional opening

The Supreme Court sets aside the lower-court judgments and lays down case law that, on a first reading, appears unequivocally favorable to the taxpayer: where the rental entity belongs to a group of companies within the meaning of Article 42 of the Commercial CodePDF and Article 5.1 of the Corporate Income Tax Law (LIS)PDF, and the leasing activity is organized using the group’s human and material resources—even if they are centralized in other companies—the full-time employee requirement must be deemed met.

Nevertheless, the Court immediately introduces a condition that is the real key to the judgment: this criterion applies only where the economic and functional reality of the group makes it possible to establish that there is a unity of resources and activity at group level and that the rental company is functionally integrated into that activity. In other words, the rental company must serve the group’s economic activity, and not merely use its resources.

The counterpart is equally explicit: the criterion does not apply where there is merely formal membership in the group, without the leasing activity being functionally and economically articulated with and integrated into the activities of the other companies. In that case, the requirements of Article 27.2 LIRPF must be demonstrated on a stand-alone basis by the rental company itself.

The specific case helps in understanding the case law; the problem lies in extrapolating it

The case decided by the Supreme Court is particularly well suited to illustrating what the Court means by “functional integration.” ABM Corporación Empresarial is a group operating in the agricultural sector in which Microbell leased rural land under contracts imposing on the tenants complex obligations linked to other group companies: one collected the water charge, another supplied the seeds, and a third provided the irrigation technicians and laborers. The leasing was not an isolated activity carried on by a subsidiary separately from the group, but one more—essential—cog in the group’s agricultural production chain.

The difficulty arises when trying to transpose this case law to the holding structures most commonly found in Spanish family businesses. Consider a group whose main activity is the manufacture and distribution of industrial products, but one of whose subsidiaries holds real estate unrelated to that activity and leases it to third parties. Could the employee requirement be deemed met through the staff employed by the industrial companies? In light of the Court’s reasoning, the answer appears to be no: the leasing activity would not be functionally integrated into the group’s economic activity, but would merely “use its resources.”

What about real estate groups?

An intermediate scenario, and probably the most relevant in practice, is that of a group of companies whose main economic activity is precisely real estate: a mixed holding company that provides services to its subsidiaries, with several subsidiaries engaged, respectively, in residential leasing, the leasing of commercial premises, tourist rentals, and the purchase and sale of real estate. Could staff be centralized in the holding company and the employee requirement be deemed met for all the subsidiaries?

No categorical answer can be given. However, if we adopt a purposive interpretation—the one the Supreme Court itself has tended to favor in this area, in connection with European Commission Recommendation 94/1069/ECPDF on the transfer of small and medium-sized enterprises—provided that the group carries on a joint and unified real estate activity, with a genuine unity of resources and activity, it should be possible to meet the employee requirement at group level. The economic and functional reality of the group would make it possible to establish that unity, even though the activity consists of leasing or real estate services.

The contrast with the DGT’s position

It should be borne in mind that the Directorate General for Taxation (DGT) has consistently maintained a significantly more restrictive position. In binding ruling (consulta vinculante) V1184-25PDF of July 1, 2025, the DGT concluded that, for the shares in the rental subsidiaries not to be treated as securities for the purposes of the Wealth Tax exemption, each rental entity must independently meet the employee requirement, and that the requirement cannot be deemed satisfied by the centralization of staff in another group company.

This position had previously been upheld in numerous rulings (V0638-13PDF, V0953-17PDF, and V2513-18PDF, among others), as well as in decisions of the Central Economic-Administrative Court (TEAC) of June 30, 2010, and March 23, 2011. It is foreseeable that, despite the Supreme Court’s new case law, the tax authorities will rely on the “functional integration” qualification to continue requiring compliance on an individual basis in most cases, arguing that the economic articulation required by the Supreme Court is not present.

The judgment of July 14, 2025, as a complementary precedent

These February 2026 judgments do not arise in a vacuum; they form part of a line of case law that has been progressively relaxing the treatment of the employee requirement. In its judgment of July 14, 2025 (STS 956/2025PDF, ECLI:ES:TS:2025:3472, appeal no. 2197/2023), the Supreme Court had already held that it is sufficient to demonstrate formal compliance with the requirement in Article 27.2 LIRPF, and that the tax authorities may not additionally require justification of the economic need for the hiring. In other words, there is no room for a “reasonableness” test as to whether or not the volume of the leasing activity justifies having an employee: if there is one, the requirement is met.

The combination of both lines—that of July 2025, which prevents the need for the employee from being questioned, and that of February 2026, which allows the requirement to be met at group level—shapes a more favorable landscape for family businesses, albeit with contours that have yet to be defined.

Practical recommendations

The case law laid down by the Supreme Court represents a positive step forward, but its practical application calls for caution. Business families with holding structures that include rental companies without employees of their own should, first, analyze whether their structure allows them to demonstrate the functional integration required by the Court: the existence of a formal group is not enough; it is necessary to document that the leasing activity forms part of the group’s joint economic activity and that the group’s human and material resources are effectively applied to the management of the leases.

Second, it is advisable to review and, where appropriate, formalize intragroup service agreements, evidencing the functions that the staff of other group companies perform in connection with the management of the leased properties. The burden of proving functional integration lies with the taxpayer, as can be inferred from the Court’s reasoning.

Finally, in cases where functional integration is doubtful—groups with heterogeneous activities in which the leasing activity has no direct connection with the main activity—the most prudent option remains to continue meeting the employee requirement individually in each rental company, at least until case law and administrative practice define the contours of functional integration more precisely.

Conclusion

The Supreme Court has taken a step in the right direction by abandoning a strictly literal and formalistic interpretation of the employee requirement in the context of groups of companies, giving priority to economic reality over formalism. Nevertheless, the functional integration condition it introduces as a requirement leaves numerous questions open, the resolution of which will depend on how administrative practice evolves and on future court rulings. In any event, tax law cannot—and must not—ignore economic reality or dictate to family businesses how they organize their human and material resources when they genuinely carry on an economic activity.