Returns on capital – What is it, definition and concept | 2022

Capital yields are the benefits that a person or a company obtains from the exploitation of movable or immovable property, provided that they are not related to business activity, through leasing or assignment of the right of use and enjoyment.

These benefits, known as capital yields, are those obtained by exploiting that capital without losing ownership of it and provided that the goods are not used for the commercial activity of the company or self-employed person.

For example, the lease of a home has a benefit thanks to the exploitation of that real estate without losing ownership of the property. Instead, the sale of the property generates profits, but they are not returns on capital because ownership is lost.

Similarly, it is not a return on capital if a company dedicated to rentals obtains profits from them, because in this case they are related to its commercial activity and will be income from economic activities.

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There are two types of capital income, depending on whether the benefits are the result of the exploitation of real estate or personal property:

  • The profits obtained from the exploitation of real estate capital. An example may be renting a home.
  • Those obtained from the exploitation of movable capital. An example may be interest on a bank account.
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Characteristics of returns on capital

The essential characteristics of capital returns are:

  • They have to be monetary considerations for them to be yields. It is not worth that they are considerations in kind.
  • They can come directly or indirectly from a patrimonial element of the natural or legal person.
  • These goods must be owned by the natural or legal person.
  • The goods cannot be subject to business activity. If so, they would be the object of their business and, therefore, they would cease to be this type of income.
  • The tax administration establishes deductible expenses, that is, people who declare these returns can deduct certain expenses. This means that the base that will be taxed will not be the net income, but these expenses will be subtracted.

Net Return on Capital = Gross Return on Capital – Deductible Expenses

  • These deductible expenses are those necessary to obtain these benefits (such as the taxes originated by the estate) and those caused to defray the use and deterioration of the estate (such as the payment of an insurance premium).

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