VAT on the construction and rental of holiday apartments in Spain
By Jesús Ruíz Ballesteros, Ruiz Ballesteros Lawyers and Tax Advisors
Continuing on from our previous article, let´s assume that we are a company, that we have purchased a plot of development land and on this land, we have built ten apartments. We have paid VAT on the purchase of the land and also during the construction of the apartments, as we have contracted the services of a building company.
VAT on construction invoices
First of all, we shall clarify the VAT on construction invoices. In October 2012, there was a change in the law, amending paragraph 2 of article 84 of the VAT Act.
Until 2012 the taxpayer responsible for VAT was always the entrepreneur who carried out the operation, delivered the goods or provided the service, as he was the one obliged to charge VAT to his clients and remit the tax to Hacienda (Spanish Inland Revenue). But with the bankruptcy of so many construction and development companies between 2008 and 2014, legislators decided to change this point, so now the taxpayer in some operations could be the entrepreneur who receives the goods or the service. With this change, Hacienda was assured that they would not have to refund VAT amounts to bankrupt companies or have to deal with situations where a company receives amounts for VAT and then is unable to pay those amounts to Inland Revenue due to having insufficient funds at the time of making their periodic VAT returns.
Revisions to section (f) of sub-section 2 of article 84 of the VAT Act now mean that the entrepreneur for whom the operation is carried out will be the taxable entity for VAT:
1. f) In the case of building work, with or without inclusion of materials, as well as providing the employees needed to carry out the work, as a result of contracts entered into directly between the developer and the contractor when the object is the urbanisation of land or the construction or rehabilitation of buildings.
The provisions established in the previous paragraph will also be applied when the recipients of the operations act at the same time as the principal contractor or as subcontractors in the conditions indicated.
This means that, in practice, all invoices received by the development company (owner of the land) from the building company will include both output and input VAT. This effectively means not having to pay VAT on any construction invoices, with the condition that this has been previously agreed upon, and these conditions have been included in a signed contract between the developer and the contractor for the construction of the properties. Similarly, the same will apply to a construction contractor who subcontracts other professionals to carry out part of the work. For example, should the contractor need an electrician and subcontracts this service, he will still receive invoices where he does not have to pay VAT.
This way, it is clear that the developer is paying input VAT during construction, even though he is not paying it in the invoices or certifications received from the contractor. This means he has the right to deduct VAT amounts paid and is also compensated for these amounts with the VAT charged at the moment of the sale, or through the rental of the built properties.
Regarding VAT on the rental of built properties:
Once construction is finished, the company that owns the land will also be the owner of 10 apartments and has the obligation to sell or rent the properties with VAT. Why with VAT? Below we will answer this question:
When renting the apartments, the company owners must bear in mind that if they want to continue deducting the VAT paid, and also be eligible for the refund of amounts paid during the construction, they must rent out the properties with VAT. However, this can create a problem because the rental of properties (houses to life, not commercial local), in principle, is exempt from VAT when the property is used for residential purposes (article 20. One. 23rd, paragraph b of the VAT Act). This would involve receiving income without VAT and breaking the principal of the relationship between income and expenses, in a way that Hacienda could declare that VAT paid during the construction is not deductible and refuse to refund the full amount of VAT already paid, which would also lead to a tax penalty for having asked for the refund of the VAT paid. Considering that the penalty could amount to 50% of the VAT refund requested, we could be talking about a very large penalty.
The solution would be to sell or rent out the apartments with VAT. Below we review what options we have to rent out the apartments with VAT, so that we can keep our right of deducting it and possibly receive a refund for amounts already paid.
To rent with VAT, we have the following options:
1. We rent the property to a company without indicating in the contract that the property will be used as a regular place of residence for a particular person. This way the tenant is a company, and we will charge VAT on the rental.
2. We rent out the property as a business office, and include this use in the contract, specifying the property will not be used as a home, for which VAT is charged. A withholding is also made for personal income tax, (at the moment the withholding is 15%), in accordance with the rules on income tax – the same article 20 and articles 90 & 91 of the VAT Act, under which VAT is paid at the rate of 21% for these rentals.
3. We rent out the property as a holiday apartment offering catering services which include: laundry service, making beds, offering breakfast and lunch, room cleaning and linen changing. To offer these services, we must have at least one person employed who will be in charge of these services, for if we pass on these services to a subcontracted company, we run the risk of the tax inspector not accepting these services. This point is still to be seen, as each inspector interprets the regulation as they personally understand it.
It is evident that this legislation can be interpreted in different ways and have different applications. For this reason, it is essential to have tax planning for every company operation that could involve you in all these different taxes and regulations. This is why, as we always say, you should seek professional advice.
Jesús Ruíz Ballesteros
GGI member firm
Ruiz Ballesteros Lawyers and Tax Advisors
Law Firm Services, Tax
T: +34 952 77 98 74
Ruiz Ballesteros Lawyers and Tax Advisors is a firm of lawyers, economists and tax advisors established more than 15 years ago. Highly qualified professionals cover all areas of legal, tax, accounting and commercial requirements for clients. Continuous training, excellence, taking care of every detail, and upholding high ethical standards are the guiding principles of the firm.
Jesús Ruíz Ballesteros is the Founder and Director of Ruiz Ballesteros. Holding an undergraduate degree in business and finance, a master’s in taxation, as well as a degree in law, Jesús is an innovative entrepreneur and an expert in the Spanish taxation system, international taxation, and corporate commercial law. He is also the developer of Paxtum, the first legal app in Spain. In 2018, Jesús Ruíz Ballesteros was awarded the Cruz Blanca for Civilian Merit by the Ministry of the Interior of Spain.
Published: Indirect Taxes Newsletter, No. 13 Spring 2022 l Photo: Arturo - stock.adobe.com