Tax treatment of farming activity: an overview

This content is general information for educational purposes and does not replace advice from a tax advisor or accountant specialising in farm taxation. Choosing how to be taxed on farming activity — which regime to apply within personal income tax, whether or not to set up a separate entity, how to declare income and expenses — depends on very specific circumstances of each holding and each holder, and has consequences that extend over time, so it is not a decision that should be made without guidance from a professional who knows your real situation.

What this guide can offer is a general overview of what it means for there to be a specific tax regime for farming activity, what concepts it involves, and what questions are worth asking your advisor before registering or changing regime. Nowhere will you find a percentage, a specific module or a return figure, because that data changes with the regulations and depends entirely on your particular activity.

When an individual carries out a farming activity on a self-employed basis — crop growing, livestock or other agricultural pursuits — habitually, personally and directly, that income is considered, for personal income tax purposes, income from economic activities, treated differently from employment income or investment income. Income tax regulations have also provided some specific particularities for the farming sector, recognising that farming activity has its own characteristics — seasonality, dependence on weather factors, long production cycles — that do not always fit well within the general rules designed for other types of economic activity.

That specificity translates, among other things, into the existence of more than one method for determining the return on the activity for tax purposes, with its own rules and access requirements for each. The choice between these methods is not neutral: it can have a significant impact on the final tax burden and also on the formal obligations — books, records, invoicing — that the holder of the operation must meet throughout the year.

It is also worth distinguishing between the taxation of farming activity under personal income tax — which this guide covers — and other taxes that may also affect someone carrying out this activity, such as VAT on the operation's own transactions, which has its own special regimes designed for the farming sector, or the property tax on the land where the activity takes place, which is explained in its own guide and is independent of how the activity itself is taxed.

In very general terms, income tax regulations provide for different methods of calculating the net return of an economic activity: one based on directly estimating the actual income and expenses of the activity (with variants depending on turnover), and another based on objective signs, indices or modules that estimate the return without needing to keep detailed accounts of actual income and expenses. The farming sector has traditionally had its own module-based regime adapted to its characteristics, although its availability and access conditions have changed with successive regulatory reforms.

Each method has its own access requirements, turnover limits and formal obligations, and the choice — when there is a possibility to choose — is not always free or permanent: it can depend on billing limits, the specific activity, and decisions that must be communicated to the tax authorities within set deadlines, normally before the start of the tax year in which you want to apply one method or another. It is therefore worth deciding in advance, with the help of an advisor, rather than leaving it until the time of filing the return.

In addition to the quantitative limits, some methods require certain qualitative conditions to be met regarding the type of activity or other economic activities the same holder may carry out, which may exclude some holdings even if they meet the billing limits. Reviewing these requirements in detail before deciding avoids discovering, once the tax year has already started, that the chosen method was not actually applicable to your situation.

There is no universally better method: each one proves more advantageous depending on the holding's cost structure, turnover, the seasonality of income and other factors specific to each activity. A holding with tight margins and high expenses may benefit from a different method than one with lower costs, and that comparison can only be made with sound judgement by an advisor who knows the real figures of your activity.

Before starting a self-employed farming activity, it is worth gathering information about the type of holding to be developed (crop growing, livestock or other), the expected volume of income and expenses, whether there will be employees or collaborators, and whether the activity will be combined with other sources of income. All this information is what your advisor needs to guide you on which income tax regime and which VAT regime may be most suitable for your case, and to explain the formal obligations that each option carries.

It is also worth finding out, in parallel, about the Social Security registration obligations that usually accompany the start of a self-employed farming activity, which follow a different track from the tax one but form part of the same process of setting up the activity. Although this guide focuses on taxation, it is common for the accountant and the holder of the operation to review both aspects — tax and Social Security — together when planning the registration.

If you are going to inherit or continue an existing family farming operation, it is worth reviewing with your advisor whether the regime the previous holder was applying is still the most suitable for your situation, rather than continuing to apply it automatically out of inertia. The personal circumstances of whoever continues the activity — other income, expected turnover, investment plans — may differ from those of the previous holder, and that may justify reviewing the choice from scratch.

This type of transition — from one holder to another within the same family operation — often coincides, moreover, with other tax procedures arising from the inheritance or gift itself, as well as with dealings with farming bodies to update the ownership of rights, aid or registers linked to the operation. It is worth planning this transition with time, coordinating the tax advisor with any other professional involved — notary, farm Social Security manager — rather than handling each procedure separately and without an overall view.

The tax regime for farming activity has been the subject of revisions and regulatory changes over the years, both in the access limits for each method of determining the return and in the applicable calculation rules. A decision that was the most suitable in a given tax year may cease to be so in later years, either because the regulations change or because the circumstances of the holding itself change — growth in turnover, incorporation of new lines of activity, changes in cost structure.

For this reason, it is worth the holder of a farming operation reviewing with their advisor, periodically and not only at the time of registration, whether the tax regime they are applying remains the most suitable. This type of periodic review is especially important for holdings that have grown significantly, that have diversified their activity, or that are approaching the limits that condition access to a particular taxation method. Setting an annual review with your advisor, for example before closing each tax year, is a simple practice that reduces the risk of applying a regime that no longer fits the reality of your holding.

It is common for someone carrying out a farming activity to also have other sources of income — employment, a pension, other economic activities — and that combination can affect which regime is most suitable and how the return from the farming activity is integrated into the overall tax return. It is not the same, for tax planning purposes, for the farming activity to be the holder's only source of income as for it to be a complementary activity to another main occupation.

If the activity is carried out jointly by several people — for example, a married couple who manage the operation together, or several siblings continuing a family operation — it is worth reviewing with the advisor how ownership and the return are shared between them, because that structure can have its own tax implications both in each individual's income tax and in the formal obligations of the activity as a whole. There are different ways of organising this co-ownership — from a simple community of property to more complex company structures — each with its own tax treatment.

It is also worth bearing in mind that, if the farming activity grows to the point of considering setting up a company to run it instead of continuing as an individual, that step has relevant tax implications different from those described in this guide, which focuses on the taxation of farming activity carried out directly by an individual under personal income tax. It is a decision worth weighing calmly and with proper advice, usually further in advance than is often thought.

A common mistake is deciding on the tax regime based on what a neighbour or relative with a different operation does, without taking into account that the circumstances of each activity — type of crop or livestock, volume, cost structure — are different and may justify different decisions even if the operations look similar at first glance. What is advantageous for one operation need not be so for another, even within the same sector and the same area.

Another frequent mistake is not keeping proper records of income and expenses from the start, even when the chosen regime does not strictly require it, which later makes it difficult to compare whether another regime would have been more advantageous or to justify certain expenses in the event of a possible tax authority review. Keeping a minimum of documentary order from the start of the activity makes both day-to-day management and any future review of the applied regime easier.

It is also common to postpone reviewing the tax regime until a specific problem arises — an inspection, an unexpected growth in turnover, a regulatory change learned about too late — rather than maintaining a periodic review with the advisor as part of the ordinary management of the operation. Anticipating these changes usually turns out cheaper, in time and money, than reacting to them once they have already produced a tax consequence.

Many farming operations receive public aid or subsidies at some point, whether of European, national or regional origin, linked to farming, environmental or rural development activity. This aid usually has tax significance and, in general, is integrated in one way or another into the calculation of the activity's return, although the specific treatment can vary depending on the type of aid, its purpose and the taxation regime applied by the holder of the operation.

Not all aid is treated the same way for tax purposes: some may be considered part of the ordinary return of the activity, while others may have specific treatment depending on their nature — for example, aid linked to investments versus aid linked to ongoing production. Since receiving public aid is common in the farming sector, it is worth your advisor knowing from the start what aid you receive or expect to receive, so as to integrate it correctly into the calculation of your return and avoid surprises when filing your income tax.

If your operation combines different types of aid with its own productive activity, the coordination between both concepts may not be obvious at first glance, especially if you change taxation regime at some point. Keeping your advisor informed of any new aid you start receiving, and not just the income from selling your production, is good practice so that the taxation of your activity is correctly reflected in each tax year.