Conflicts in the application of VAT Anti-Abuse Rules

03.2015

On 12 November 2014, the Spanish Supreme Court examined the application of VAT anti-abuse provisions. The case concerned a hospital management company (an exempt activity) that delegated the construction and subsequent expansion of the hospital building to another company it owned, in order to recover input VAT. The tax authorities denied the refund, alleging abuse and simulation, claiming that the company undertaking construction and subsequent leasing was a fictitious entity, and therefore input VAT was non-deductible.

The Court analysed the concept of simulation and its relationship with the principles of freedom of enterprise and choice of business structure. CJEU precedents (Halifax and Weald Leasing) were considered. However, the Spanish authorities and Supreme Court went beyond these rulings, excessively questioning the legitimacy of the construction company. Additionally, penalties for disallowing input VAT recovery were deemed legally inappropriate, as highlighted by a dissenting opinion in the judgment. In sum, applying anti-abuse rules — even under the updated General Tax Act — remains highly contentious.

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