VAT in real estate, cross-border trade and business sales: Key insights

12.2015

++ The following is a brief summary note of the most relevant tax news published on this website over the past 12 months, highlighting some of the most important conclusions ++

VAT remains one of the most formalistic and complex taxes, especially in the context of real estate, cross-border operations, and business sales. For tax professionals, understanding its application in residential leasing, input VAT deduction, anti-abuse rules, and cross-border transactions is critical to ensuring compliance while optimising tax outcomes.

One of the most frequent issues concerns residential leases with or without VAT. When a property is leased to a company for employee accommodation, issuing VAT invoices is generally the prudent approach, allowing deduction of input VAT on renovation or maintenance costs if the lease continues over several years. However, some regional jurisprudence suggests that, if the lease identifies the employee explicitly, VAT may not be required. This decision has practical consequences: opting for VAT inclusion forfeits the 60% reduction on rental income under Spanish Personal Income Tax law (Article 23.2). For jointly owned properties, invoices must be issued under the partnership’s NIF to avoid duplicate invoicing, with rental income then attributed proportionally to each co-owner for tax purposes. The timing of invoicing is equally critical, as VAT is chargeable when services are rendered or goods delivered. Delays can lead to substantial penalties — up to 50% of the unpaid VAT — particularly when advances are received, and special attention must be paid to seasonal campaigns spanning multiple months, where VAT is typically due at the time-of-service execution rather than upon payment.

Closely linked to leasing is the deduction and recovery of input VAT. Historically, taxpayers who paid VAT erroneously had limited recourse and were often forced to claim refunds via civil courts. The General Tax Act (Article 35.2(g)) now recognises as a taxpayer the party bearing undue VAT, even if they were not obliged to pay it initially. Supreme Court and CJEU rulings, including C-35/05 and the Supreme Court judgment of 9 January 2008, reinforce this right, ensuring administrative recovery is possible. While VAT deduction restrictions exist to prevent fraud and simplify compliance, courts emphasise that limitations must be proportionate and case-specific. Expenses such as accommodation, dining, or entertainment cannot be automatically denied; indiscriminate application would violate the principle of VAT neutrality. The Supreme Court (23 December 2013), referencing CJEU C-177/99, confirmed that businesses may justify the deductibility of such costs if genuinely linked to their operations.

In cross-border contexts, VAT on trade between Spain and other EU countries such as Germany often raises practical challenges. VAT treatment depends on the goods’ location and the company’s establishment status. A German company purchasing goods in Spain is invoiced with Spanish VAT, while subsequent sales to Spanish companies are invoiced under the German entity’s Spanish VAT number without charging VAT, with the purchaser self-assessing VAT under the reverse charge mechanism. Sales to non-Spanish entities where the goods remain in Spain follow similar rules. Importantly, these scenarios are not intra-community supplies, since there is no physical transport between Member States; domestic Spanish VAT rules apply instead. This principle extends to warehousing services: the CJEU (27 June 2013) clarified that only exclusive, defined use of space akin to a property lease constitutes a link to immovable property requiring local VAT; otherwise, services are VAT-exempt for the supplier.

The introduction of the VAT One-Stop Shop (MOSS) on 1 January 2015 has partially simplified compliance for companies providing telecommunications, broadcasting, and electronic services across multiple EU Member States. MOSS allows filing a single VAT return in one registered Member State, instead of submitting multiple returns across jurisdictions. VAT is charged at the customer’s location, requiring knowledge of local rates, exemptions, and invoicing rules. While voluntary, the choice of registration state binds the company for the current and subsequent two tax periods. MOSS illustrates a shift in VAT administration towards centralisation but also underscores the continued complexity of cross-border compliance, demanding precise operational and accounting procedures.

Business sales and restructuring present another area where VAT considerations are crucial. Sales of identifiable business units integrated into another company, even if not all assets are sold, generally fall outside VAT. Staged sales are permissible but require careful documentation and adherence to conditions; failure to comply may result in substantial penalties. The CJEU’s Zita Modes (C-497/01) attempted to harmonise national interpretations of VAT on business transfers, but discrepancies remain across jurisdictions, making pre-transaction tax analysis essential. Similarly, the Spanish Supreme Court has addressed disputes over contractual clauses assigning tax liabilities to buyers (19 January 2015), confirming that contractual allocation may impose VAT obligations even when statutory limits, such as the one-year rule, would otherwise preclude recovery.

Disputes often arise regarding compensation following contract termination. The Supreme Court (27 April 2015) clarified that only amounts explicitly agreed as penalty clauses are VAT-exempt; any excess amounts are considered payment for services rendered or the reacquisition of unexercised options. Lost profits or consequential damages cannot be exempted if already included in the penalty clause. This nuanced approach reflects the principle that the economic substance of payments, rather than their form, governs VAT treatment.

The application of anti-abuse rules also continues to challenge taxpayers. In cases involving exempt hospital management activities, the Supreme Court (12 November 2014) found that delegating construction and subsequent leasing to a related entity does not automatically permit input VAT recovery if the subsidiary is deemed simulated. The Court examined simulation concepts, freedom of enterprise, and CJEU precedents (Halifax and Weald Leasing), yet Spanish authorities have at times applied stricter standards than EU law allows, highlighting the ongoing need for careful structuring and documentation of intercompany arrangements.

Finally, VAT recovery for non-residents remains a frequently contested area. Spanish authorities often deny refunds, alleging that a foreign company operates through a permanent establishment (PE) or conducts self-billing transactions with a local entity. CJEU rulings (e.g., C-210/04, C-318/11, C-319/11) emphasise that VAT is an indirect tax and that recovery depends on whether the non-resident exercises significant economic activity and risk in the Member State. Consequently, careful assessment of PE status, contractual arrangements, and documentation is vital to ensure non-resident companies can reclaim VAT lawfully.

In conclusion, VAT management in real estate, cross-border trade, and business restructuring demands a sophisticated understanding of both statutory rules and case law. Key considerations for tax professionals include the prudential choice of leases, timely invoicing, proportionate deduction of input VAT, compliance with cross-border rules, careful structuring of business sales, and awareness of anti-abuse and non-resident refund challenges. By focusing on economic substance, leveraging administrative remedies, and documenting transactions meticulously, businesses can navigate complex VAT obligations while minimising risk and safeguarding legitimate deductions.