VAT and Spanish transfer tax in complex transactions: Risks, Deductibility, and Best Practices

01.2014

++ 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 ++

In recent years, the interaction between Value Added Tax (VAT) and the Transfer Tax (ITP) in transactions involving special assets, such as solar panels, has given rise to significant disputes. During an inspection, a client who sold the entirety of his Spanish limited company’s assets — land and solar panels — faced a claim for uncollected VAT. Pursuant to Article 7.1 of the Spanish VAT Act, the transfer of a business as a going concern is not subject to VAT, but it is subject to ITP. However, the purchaser only paid ITP on the land, triggering an administrative claim for VAT on the solar panels. The Directorate General of Taxes has differentiated between non-installed panels (movable property) and solar farms with installed panels (immovable property), establishing an administrative criterion, although it lacks binding judicial authority.

Regarding penalties, the National Court, in a judgment of 12 November 2011, annulled a sanction imposed on a company for submitting substitute VAT returns for previously filed ones. Voluntary adjustments following an inspection could not be automatically penalized, as this would discourage voluntary regularization. The Supreme Court, in its judgment of 18 July 2011, held that the absence of invoices cannot be sanctioned when the taxpayer acts in good faith and intends to deduct VAT on works carried out. Automatic penalties without fraud or negligence are null, consolidating the principle of proportionality.

The CJEU, in the Mahagében cases (C-80/11 and C-142/11), delineated the limits of non-deductibility of input VAT, establishing that the tax authority cannot deny deduction solely on suspicions of supplier fraud when the taxpayer has acted diligently and holds correct invoices. It is the administration’s responsibility to verify irregularities without shifting the burden of proof to the entrepreneur.

The deductibility of VAT incurred prior to the commencement of activities and during the liquidation phase has also been clarified. According to the Spanish Tax Ruling of 7 July 2011, based on CJEU case law (C-32/03, 3 March 2005), the taxpayer retains the status of entrepreneur until final dissolution, allowing the deduction of VAT on extraordinary or initial transactions, even if the tax census deregistration has been filed. The CJEU, in its judgment of 1 March 2012 (C-280/10), confirmed that VAT incurred prior to the start of activities is deductible, provided there is no bad faith.

Risks arising from establishing a permanent establishment in Spain have also been relevant. A client who established a presence in Spain to accelerate VAT refunds initially received an administrative denial based on Article 119.1 of the VAT Act, on the grounds that without revenue there was no permanent establishment. After technical arguments, the refund was confirmed, avoiding prolonged litigation.

The characterization of holding companies affects VAT treatment. According to the CJEU and the Spanish tax administration (judgment of 29 September 2009, C-29/2008; Ruling V0764/2011), pure holdings, which only receive dividends, are outside the scope of VAT; mixed holdings, which provide services to subsidiaries, may deduct VAT in proportion to their activities and expenses related to the acquisition of shareholdings.

In real estate investments, the reverse charge mechanism allows deduction of VAT incurred on the purchase of properties intended for rehabilitation and resale if the requirements of Article 20.1.22.B) of the VAT Act are met: structural works exceeding 25% of the acquisition price and at least 50% dedicated to rehabilitation. If these conditions are not met, the transaction is subject to ITP and the VAT incurred becomes an additional cost.

The rental of tourist apartments raises similar issues. As a general rule, short-term rentals to tourists are VAT-exempt, preventing deduction of VAT on repairs or services. Only when the lessor provides hotel-like services — reception, daily cleaning, regular staff — is the activity subject to VAT, enabling deduction. The applicable rate (10% or 21%) depends on the specific case.

Overall, these rulings, rulings, and judgments illustrate the complexity and nuances of VAT application in Spain and the EU, particularly in complex transactions, real estate investments, holding companies, and tourism activities, where proper fiscal classification, taxpayer good faith, and business diligence are decisive to avoid undue penalties and ensure deductibility of incurred VAT.