The waiver of the VAT exemption on Spanish real estate transactions is relatively common in transactions between businesses, but applying it correctly involves much more than simply including a clause in the sale and purchase agreement or notarial deed. Before determining whether a transaction can effectively be subject to Spanish VAT, it is necessary to analyse the nature of the transaction, the status of the parties, the intended use of the property and the purchaser’s right to deduct input VAT.
In practice, an incorrect application of the waiver can completely change the expected tax treatment of the transaction and may subsequently lead to VAT or Spanish Transfer Tax assessments. At VAT & Green Tax, when analysing these transactions, we always start with a preliminary question that is sometimes overlooked. Before considering whether a VAT exemption can be waived, it must first be established that the transaction is actually subject to Spanish VAT and that an exemption applies.
Which Spanish real estate transactions allow a waiver of the VAT exemption?
The possibility of waiving the exemption mainly concerns the real estate exemptions provided for in Articles 20.One.20 and 20.One.22 of the Spanish VAT Act (Law 37/1992). These provisions cover, among other situations, certain supplies of land and, particularly, second and subsequent supplies of buildings.
A common example is the sale of a previously used commercial property forming part of the seller’s business assets. Where the transaction qualifies as a second or subsequent supply of a building, it will generally be subject to but exempt from VAT. At that point, it becomes necessary to determine whether the requirements established in Article 20.Two of the Spanish VAT Act are met so that the seller may waive the exemption.
However, the analysis should not begin with the waiver itself. It is first necessary to establish who is selling the property, in what capacity the seller is acting and whether the property genuinely forms part of the seller’s business or professional activity. If the transaction is not subject to VAT in the first place, there is no VAT exemption to waive.
VAT liability must be established before considering the exemption
Spanish Binding Ruling V1422-26 provides a useful example of why this order of analysis matters. The case concerned an individual carrying on a business or professional activity who had acquired, through a Spanish Tax Agency auction, a 16.66% bare ownership interest in commercial premises.
At first sight, the issue might appear to be whether the VAT exemption could be waived. However, the Spanish Directorate-General for Taxes, the Dirección General de Tributos (DGT), first examines a more fundamental question. It must be determined whether the person transferring the bare ownership interest is actually acting as a taxable person for VAT purposes.
The DGT recalls that, where a usufruct exists, the economic exploitation of a property will normally be carried out by the usufructuary. For example, it is the usufructuary who may carry out the rental activity. The mere holder of bare ownership does not, solely for that reason, acquire the status of a taxable person in relation to the economic exploitation of the property.
For this reason, depending on the particular circumstances, the DGT considers that there may be evidence suggesting that the person transferring the bare ownership was not acting as a business or professional for VAT purposes. If that were ultimately the case, the transfer would not be subject to VAT and there would therefore be no exemption that could be waived.
The analysis is different if the transfer is made by a taxable person acting as such. In that case, the transfer of bare ownership may constitute a supply of goods for VAT purposes and, if it qualifies as a second or subsequent supply of a building, the exemption under Article 20.One.22 may apply. Only at that stage does it become relevant to consider whether the exemption may be waived.
This is a good example of why, in Spanish real estate VAT, the sequence of the analysis is essential.
When can the Spanish VAT exemption be waived?
Once it has been established that the transaction is subject to VAT but exempt, Article 20.Two of the Spanish VAT Act becomes relevant. The exemption may be waived where the purchaser is a taxable person acting in the course of its business or professional activities and is entitled to deduct all or part of the input VAT incurred on the acquisition.
Spanish legislation also provides for another possibility. Even where the purchaser does not initially meet that requirement, the waiver may still be available where, based on the foreseeable use of the property, it will be used wholly or partly for transactions giving rise to a right to deduct VAT.
This means that the purchaser’s specific circumstances must be examined. It is not sufficient to establish that the purchaser is a company or is registered as a business. What matters is the capacity in which the purchaser is acting in that specific transaction and how the property will subsequently be used.
A full right to deduct VAT is not required
An important point is that the purchaser does not necessarily need to be entitled to deduct 100% of the input VAT. Spanish VAT legislation also allows the waiver where there is a partial right to deduction.
Binding Ruling V2978-16 provides a useful example. The case concerned the acquisition of a building containing residential units intended for tourist accommodation and parking spaces rented to third parties.
Before considering the waiver, the DGT also examined whether the transaction could amount to the transfer of an autonomous economic unit and therefore fall outside the scope of VAT. If that were not the case and the property transfer were subject to VAT, it would then be necessary to consider the exemption applicable to second and subsequent supplies of buildings.
The DGT subsequently analysed the activities that the purchaser intended to carry out. Some of the activities associated with the property could generate a right to deduct VAT while others could receive a different VAT treatment. The fact that the purchaser had only a partial right to deduct did not, in itself, prevent the VAT exemption from being waived.
This is particularly relevant for transactions involving properties used for several different activities or purchasers subject to the Spanish VAT pro rata deduction rules. A waiver should therefore not automatically be ruled out simply because the purchaser cannot deduct all of the VAT incurred.
Can a foreign company waive the VAT exemption on a Spanish property transaction?
The fact that the seller is a foreign company does not, in itself, prevent the VAT exemption from being waived. Nor does the waiver depend on whether the foreign entity has a permanent establishment in Spain.
These are different questions that should not be confused.
The key issue for the waiver is whether the real estate transaction is subject to and exempt from Spanish VAT, whether it is one of the exemptions for which Spanish legislation permits a waiver and whether the substantive and formal requirements are satisfied. In particular, the position of the purchaser and its full or partial right to deduct input VAT remain central to the analysis.
This is especially relevant in cross-border real estate transactions, where the seller may be established outside Spain but own property located in Spanish VAT territory. The seller’s residence or establishment status does not, by itself, determine whether the exemption can be waived.
Spanish NIF starting with “N” and non-established businesses
Foreign legal entities operating in Spain may have a Spanish tax identification number beginning with the letter “N”. In the context of VAT, this will commonly identify a foreign legal entity that is not established in Spain.
This status may have important consequences for determining who is responsible for accounting for the VAT. Where a non-established business carries out a transaction subject to Spanish VAT, the reverse charge mechanism may apply under Article 84 of the Spanish VAT Act, depending on the circumstances.
Spanish Binding Ruling V1641-24, for example, deals with the VAT position of a non-established foreign entity holding a Spanish NIF beginning with “N” and the application of the reverse charge mechanism to transactions carried out in Spanish VAT territory.
However, the reverse charge and the waiver of the real estate VAT exemption operate at different levels.
The waiver determines whether a transaction that would otherwise be exempt becomes taxable and non-exempt. The reverse charge determines who must account for the VAT once the transaction is taxable.
This distinction is particularly important for foreign businesses. A non-established entity may therefore participate in a Spanish real estate transaction in which an exemption is validly waived, while the VAT due on the transaction is accounted for by the purchaser under the reverse charge rules, provided that the relevant legal requirements are met.
There does not need to be a Spanish permanent establishment merely in order for a waiver of the exemption to be possible. What must be checked is whether the transaction itself falls within the scope of Spanish VAT, whether an exemption capable of waiver applies and whether the purchaser satisfies the requirements laid down in Article 20.Two of the Spanish VAT Act.
For international groups and foreign investors, this distinction can prevent a common mistake. Being non-established in Spain is not, by itself, an obstacle to the waiver of the VAT exemption.
The intended use of the property can determine the outcome
One of the issues that most frequently causes difficulties in practice is the intended use of the property by the purchaser. The VAT treatment of an acquisition can differ substantially depending on the activity that will subsequently be carried out.
Binding Ruling V71-22 concerned the sale of a residential property that had been rented out for several years and was to be acquired by a limited company intending to operate it as holiday accommodation. The transfer could qualify as a second or subsequent supply of a building and therefore be subject to but exempt from VAT.
Whether the exemption could be waived depended, among other factors, on the purchaser’s right to deduct VAT. The DGT makes an important distinction in this respect. Where the property is subsequently used for a residential letting that is exempt from VAT because no hotel-type ancillary services are provided, that activity does not give rise to a right to deduct the VAT incurred on the acquisition.
Accordingly, simply describing an activity as “tourist accommodation” is not enough to determine its VAT treatment. It is necessary to understand how the activity will actually operate. Renting furnished accommodation without additional services is not treated in the same way as providing accommodation together with services characteristic of the hotel industry.
These distinctions are precisely why the transaction should be reviewed before completion. A general description of the intended use of the property may be insufficient if the purchaser later needs to demonstrate to the Spanish tax authorities that the requirements for the waiver were satisfied.
The business use of the property must also be capable of being demonstrated
Binding Ruling V888-22 deals with another issue frequently encountered in real estate transactions. A business owner who rented several commercial premises intended to sell one of them, although that particular property had remained vacant for several years because no new tenant had been found.
The fact that a property is temporarily vacant does not necessarily mean that it has ceased to form part of the seller’s business assets. However, the DGT emphasises that whether the property remains allocated to the business is a question of fact that must be supported by evidence.
This distinction can be decisive. If the commercial premises continue to be allocated to the business activity, their sale may be subject to VAT and, where the transaction qualifies as a second or subsequent supply, the VAT exemption may potentially be waived. If that business allocation cannot be established, the tax analysis may be different.
In the event of a tax audit, the available documentation can therefore become highly relevant. Previous lease agreements, the accounting treatment of the property, evidence that the owner continued seeking tenants, the tax treatment historically applied to the asset or other supporting documentation may help demonstrate the actual status of the property.
How should the waiver of the VAT exemption be documented?
In addition to satisfying the substantive requirements, the waiver must be properly documented. Article 8 of the Spanish VAT Regulations requires the waiver to be reliably communicated to the purchaser before or at the same time as the supply and to be exercised individually for each transaction.
The purchaser must also provide a declaration confirming that it is acting as a taxable person and that it has a full or partial right to deduct the VAT incurred. Where the waiver is based on the foreseeable use of the property, the purchaser must similarly confirm that the intended use will give rise, wholly or partly, to a right to deduct VAT.
Spanish case law has, in certain circumstances, adopted a less formalistic approach and accepted a waiver where the documentation as a whole clearly demonstrated the parties’ intention to make the transaction subject to VAT. Nevertheless, this should not be viewed as a reason to document the transaction inadequately.
For significant real estate transactions, the waiver and the underlying requirements should be reviewed expressly before completion, rather than relying on a later administrative or judicial interpretation of what the parties intended to do.
What happens if the VAT exemption is waived incorrectly?
The requirements governing the waiver should not be treated as a mere formality. If the parties apply the waiver when the statutory conditions are not actually satisfied, the VAT treatment initially applied to the transaction may have to be corrected.
Spanish Binding Ruling V245-14 considered the consequences of a real estate transaction in which the VAT exemption had been waived without the relevant requirements being satisfied. The ruling addresses the potential need to correct VAT charged and make the corresponding adjustments to deductions.
The same ruling is relevant for another reason. Where the waiver has been validly exercised, it is not simply an option that the parties may subsequently reverse because another tax treatment becomes more convenient.
This reinforces the importance of reviewing the purchaser’s VAT position and the intended use of the property before completion. An incorrect conclusion can affect not only the VAT treatment but also the interaction with Transfer Tax and, in some cases, the purchaser’s input VAT deduction.
What are the VAT consequences of waiving the exemption?
Where the waiver is valid, the supply ceases to be VAT-exempt and becomes subject to and not exempt from Spanish VAT. These transactions are also generally subject to the reverse charge mechanism under Article 84.One.2(e) of the Spanish VAT Act.
This means that the seller does not charge the VAT amount to the purchaser in the usual way. Instead, the purchaser, acting as a business or professional, accounts for the corresponding VAT through the reverse charge mechanism. The invoice must include the appropriate reference to the reverse charge.
The waiver also affects the interaction between Spanish VAT and Transfer Tax and Stamp Duty (Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados or ITPAJD). Where the transfer is subject to and not exempt from VAT, the transaction is not generally subject to the Transfer Tax (TPO) component of ITPAJD, although the possible application of Stamp Duty must be reviewed separately in each case.
Binding Ruling V1422-26 is once again useful in illustrating this point. The DGT states that if the transaction arising from the auction were subject to and exempt from VAT and the exemption were validly waived, TPO would not apply. Conversely, if the transaction were outside the scope of VAT or remained subject to but exempt from VAT, the tax treatment would be different.
Waiving the VAT exemption in auctions and enforcement proceedings
Properties acquired through judicial or administrative enforcement proceedings are subject to certain specific rules. The Sixth Additional Provision of the Spanish VAT Act allows a successful bidder who is a business or professional to exercise certain rights in the name and on behalf of the taxable person.
These rights include, where the relevant conditions are met, the ability to waive the exemptions referred to in Article 20.Two and to issue the corresponding invoice.
Binding Ruling V1422-26 expressly confirms this possibility in relation to a property awarded through a Spanish Tax Agency auction. Nevertheless, the existence of this power does not mean that the waiver applies automatically. The transaction must still be subject to and exempt from VAT and all substantive requirements for the waiver must be satisfied.
Why the transaction should be reviewed before signing
One of the recurring issues we see in real estate transactions is that the VAT analysis takes place too late. In some cases, the tax position is not reviewed until the commercial terms have already been agreed, a deposit agreement has been signed or the notarial deed is close to completion.
Spanish real estate taxation requires a logical sequence of analysis. The first step is to determine whether the seller is acting as a taxable person and whether the transaction falls within the scope of VAT. The next step is to determine whether an exemption applies. Only once these questions have been resolved should the possibility of waiving the exemption be considered.
The purchaser’s right to deduct VAT, the intended use of the property and the documentation supporting the waiver must then be reviewed. In transactions involving foreign businesses, it is also important to determine whether any party is established in Spain for VAT purposes and whether the reverse charge mechanism applies. Finally, the consequences should be considered not only for VAT purposes but also in relation to Spanish Transfer Tax and Stamp Duty.
The rulings discussed above illustrate why automatic answers are rarely advisable. A residential property intended for rental, a building used for several activities, commercial premises that have remained vacant for several years, the transfer of bare ownership, a property acquired at auction or a transaction involving a non-established foreign company can all raise different issues even though every case involves a Spanish real estate asset.
At VAT & Green Tax, we advise international companies, investors and professionals on the Spanish VAT treatment of real estate transactions, including the waiver of VAT exemptions, the reverse charge mechanism, transactions involving non-established businesses and the interaction between VAT and Spanish Transfer Tax and Stamp Duty. Our work is not limited to determining how a transaction should be taxed. We also review how it should be structured and documented in order to reduce the risk of subsequent challenges from the Spanish tax authorities.
If you need VAT assistance on these kind of transactions, you can contact our specialists at hola@vatgreentax.com.
