VAT on the purchase of buildings for later renovation and sale. Is the reverse-charge mechanism applicable?

08.2013

The reverse-charge mechanism has been recently introduced for the purchase of real estate provided that certain conditions are met; this allows the buyer, to save the input VAT from the purchase. The question raised was whether this benefit could be applied to the purchase of a block of offices or flats which would be later renovated and converted into a hotel and then sold.

The first consideration is whether the planned renovation works comply with the requirements set out in Art. 20.1.22.B) of the Spanish VAT Law, such as: 1) Renovation after purchase; 2) Structural, not minor or cosmetic works; 3) The works must account for more than 25% of the value of the building (excluding the land), of which, at least 50% must be renovation costs.

If the above conditions are met, the purchase will be subject to VAT (the reverse-charge mechanism does not apply here) and the date of sale of the renovated building shall be considered the date of first supply and shall also carry VAT. Both the input VAT on the renovation works and the purchase of the property shall be deductible. However, if the aforementioned conditions are not met, the purchase transaction shall be exempt from VAT, but subject to Tax on Capital Transfers (“Impuesto de Transmisiones Patrimoniales”, or “ITP”). This is because, as the later sale of the property shall be VAT-exempt — pursuant to Art. 20.1.22.A) of the Spanish VAT Law, which considers it a second or later supply — the buyer shall not be entitled to waive the exemption from VAT (Art. 20.2 of the Spanish VAT Law), as input VAT shall not be deductible (Art. 94 of the Spanish VAT Law). In this case, neither the Tax on Capital Transfers from the purchase of the property nor the input VAT from the renovation works shall be deductible, therefore implying an added cost to the renovation works. Another disadvantage is that it is not possible to apply the reverse-charge mechanism, as it is not possible to waive the exemption from VAT.

++Published at the tax newsletter of the German Chamber of Commerce related to VAT news.++