Contracts stipulating assumption of tax liabilities and VAT conflicts

04.2015

It is common in sales or service contracts to stipulate that the buyer assumes all tax liabilities arising from the transaction. The Spanish Supreme Court judgment of 19 January 2015 addressed whether such contractual clauses may conflict with VAT legislation, which limits the ability of sellers to charge VAT more than one year after the transaction.

The case involved the sale of residential properties owned by the Ministry of Defence. The contract specified that buyers would assume the tax burden. The buyers incorrectly paid transfer tax instead of VAT. The seller subsequently demanded VAT payment, which the buyers challenged as time-barred.

The Court ruled that the buyers were liable to pay VAT, as their obligation arose from the contract, not from the general VAT rules defining the taxable person. Contractual allocation of economic responsibility takes precedence over formalities for the purpose of VAT recovery. Such clauses often cause disputes, particularly when the applicable tax is unclear, as illustrated by the ITP versus VAT conflict in this case.

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