Distinguishing Between Taxes on Property Purchases and Sales: VAT or ITP-AJD

Every day the different Tax Offices^[1] are making the application of the regulation more complex, since both want to charge their taxes and they fight among each other to obtain the tax, especially when it is high, as is usually the case with property purchases and sales.

At first glance it might seem a trivial issue and many people do not give it any importance, but when you purchase a property, an important part of the cost or investment is the tax or taxes to be paid.

In this case, we are going to stick to a very specific and common example: the purchase of a property, but considering that, for our example, both the buyer and seller are legal persons (companies) and neither is the developer.

Remember that each case must be treated in a unique and special way, without assimilating it to another case that may seem the same or similar, since normally small details make big differences.

In this case, purchasing a building (a house for example), when selling a company and being a second transfer, that is, whoever is selling bought the property from the development company and is now transferring it to obtain a profit or out of necessity, it can be said that the operation would be exempt from VAT^[2]. It is then transferred with ITP-AJD (Tax on Property Transfers and Documented Legal Acts), in the form of TPO (Onerous Property Transfers). However, if certain requirements are met, the VAT Law allows you to waive this exemption from VAT and, therefore, make the transaction with VAT (which is collected by the State Tax Authority), instead of paying TPO (which is collected by the Autonomous Community).

Why is this operation usually carried out with a VAT exemption waiver?

The answer is simple, when the exemption is waived, the rule of Article 84. One. 2º, paragraph e) of Law 37/92 applies, which is the one regarding reverse charges. In this way, the buyer becomes a taxpayer who charges and pays the VAT at the same time, which means that in practice they do not pay VAT, thus saving them from the VAT payment. Although in these cases the modality of AJD (Documented Legal Acts) of the aforementioned ITP-AJD is accrued, this modality is usually between 1% and 2% in almost all autonomous communities, a percentage much lower than 8 or 10% for the purchase of properties, either with VAT or with TPO, and of course lower than 21% if the property is a premises that is purchased with VAT.

A priori, this operation may seem ideal for companies, both the buyer and seller, since the buyer pays less money and the seller, in some cases, is able to sell at a higher price or simply find a buyer, since otherwise the buyer would not have access to buy the property in question. Let’s suppose a price of 500,000 euros for a property. The difference would be from 10% to 2%, that is, 8%, which in our case means 40,000 euros that the buyer saves directly when purchasing the apartment.

Moreover, this way of purchasing allows you to maintain the right to deduct the VAT payments from the rest of the expenses in the purchasing company.

What requirements must the parties meet in order to waive the VAT exemption and apply the reverse charge?

Well, this is where is the documentation and the need to carry out these operations with a tax lawyer who is expert in the field is of importance^[3].

The buyer must be subject to VAT and have the right to deduct the VAT payments made, that is, it will be an entrepreneur or professional carrying out their activity and will carry out transactions normally subject to value added tax.

With regards to the seller, they must be subject to VAT. Let’s discuss this, because in Articles 4 and 5 the VAT Law states that entrepreneurs or professionals who make deliveries of goods within the scope of the tax (Spanish Peninsula and Balearic Islands), on a regular or occasional basis, for a fee (not free), in the development of their business activity, will be subject to VAT. In addition, Article 5 specifies that, in general, commercial companies will be considered entrepreneurs, unless there is proof otherwise.

So, what happens if the seller is a company that has not been registered in economic activity or if the property was not involved in the economic activity?

A controversy arises here whose solution must be given for each specific case, depending on the small details referred to at the beginning, since the performance of an economic activity, for VAT purposes, is not determined by registration in the Tax on Economic Activities by means of a 036 form, but rather by the reality of the selling company, that is, “things are what they are and not what the parties say they are”, in such a way that if that company is engaged in the purchase and sale of properties and can prove it, then it will be subject to VAT even though it has not been registered as such.

A Tax Inspector will normally request documentation to prove whether or not you are subject to the tax, which in some cases can be seen with the quarterly, annual and other returns. However, it must also be stated that the property in question was used for the economic activity of the company.

However, as we have experienced on some occasions, the following may be the case: the inspector of the autonomous community, upon seeing an operation carried out with VAT (in which their autonomous community has only charged that 1% or 2% of AJD), will try to defend that the seller was not subject to VAT, so that the operation is subject to TPO of between 7 and 10% (depending on the autonomous community).

Who will the inspector ask for the documentation?

The inspector will ask the purchasing company for the documentation, but the most complex part of the case is that the documentation that will be asked for will be from the selling company, since it is the selling company that must be subject to VAT (the purchasing company too, but that is not in question in this example). The reason for this is that, if in the end the operation should have been carried out with TPO, it will be the buyer who will be obliged to pay this tax.

In this way, we are faced with a Tax Inspection on the purchasing company in which they are asking you to provide information on the selling company. Be aware that this may happen two, three or four years after the signing of the deed of sale and the relationship between companies may well not remain beyond the signing of said sale. Moreover, the seller may even have dissolved and liquidated, hence the importance of getting all the documentation before the signing of the deed.

In our opinion, it is the Tax Authorities who should prove that the seller is not subject to VAT, but will surely apply Article 105 of the General Tax Law to reverse the burden of proof and try to get the buyer to prove this, which can become diabolical.

It is clear that these operations are complex, or they can be, despite not appearing so at first. The important thing is to foresee them, since once they are signed all you can do is wait for the opinion of the Tax Authority.

^[1] We are referring to the Spanish State Tax Authority and the Tax Office of the Autonomous Community, which are different and charge different taxes.

^[2] By applying Article 20.One.22 of the Value Added Tax Law 37/92.

^[3] Of course, we recommend that you seek advice from an expert firm in the field, such as Ruiz Ballesteros Abogados y Asesores Fiscales, which has lawyers and economists who are experts in these operations and who control both the legal and tax aspects of purchasing properties.