VAT in the Non-Payment of Property Leases

What happens to the VAT if the tenant of my premises doesn’t pay me?

Should I stop issuing invoices?

When the tenant stops paying the rent of a premises, the owners usually make various mistakes, such as:

The first mistake that is usually made is to stop issuing invoices. It’s true that this generates a financial loss meaning that at the end of each quarter you have to pay VAT which you have not collected, and you will also have to pay for the income not received, either in Income Tax or Corporate Tax, depending on whether you are an individual or a company. However, you must not stop issuing the corresponding invoices.
Another common error is to issue invoices as they are paid when there are delays in payment, as indicated by the Spanish General Tax Directorate in its binding consultation V1047-14 de 14 de abril de 2014.

Why should I continue to issue invoices if I’m not being paid?

(To make matters worse, the one that benefits is the tenant, who can indeed deduct the VAT due and charge the expense as deductible in their activity).

The leasing contract, as long as it is not terminated by a court judgment and eviction, or by written agreement between the parties, will remain in force. The contract cannot be unilaterally terminated, and you cannot stop issuing invoices.

So, what can I do?

Article 80. Four of the Spanish VAT Law 37/92 and Article 24 of its Regulation establish some requirements in order to recover the VAT paid to the Inland Revenue and not collected.

When is a credit corresponding to VAT paid considered to be fully or partially uncollectible?

For VAT purposes, it will be considered an uncollectible credit when the following requirements are met:

That one year has passed since the accrual of the output tax without having collected all or part of the credit arising therefrom. This period shall be six (6) months when the owner has an annual turnover of less than 6,010,121.04 euros.
That these invoices are properly accounted for.
That the tenant acts in their capacity as a business or professional.
That the owner has urged its collection by means of a court claim to the debtor or by means of a notarial requirement to the same.

If I meet the aforementioned requirements, how do I recover the VAT payments?

Following the aforementioned period of six months, or one year, a second period of three months is opened to issue the corresponding rectifying invoice (credit) in which the output VAT is fully or partially cancelled. There is nothing to prevent us from rectifying several invoices at once, for the purpose of recovering the VAT payments, reducing time and formalities if we control the deadlines very well.

Once the rectifying invoice has been issued, we must send it to the tenant. It is important that you have justification that the tenant has received said invoice, por example via burofax (official certified fax sent through the Post Office).

From the date of issue of the rectifying invoice, a third period of one month is opened to notify the tax authorities of said change. This notification must be made electronically through the Spanish Tax Office’s website and using a form provided for such purpose, for which a digital certificate is a prerequisite.

I made credit invoices, but, in the end, I have collected some. Do I have to pay VAT?

In this case, it will depend on the following:

If you have lodged a court claim and you reach an agreement with the other party that you are dropping said judicial action because they are paying you the amounts, then you must issue invoices for those amounts within one month of dropping the judicial action or collection agreement.

If you file a judicial action and obtain an award, you will not have to issue invoices.

I’ve missed the deadline for recovering VAT. Have I lost everything?

It’s not all lost. Let us explain:

We must separate the effects on VAT from the effects on Corporate Tax or Personal Income Tax (hereafter “IRPF“):

On VAT: in this case, VAT payments made to the Spanish Tax Office but not collected are lost, thus affecting your cash flow.
With regards to Corporate Income Tax: if it is a legal person, they may deduct the losses generated as a result of its tenant’s non-payment as an expense, provided that any of the following circumstances apply, as established in Article 13.1 of the Corporate Tax Law:

That a period of six months has passed since the expiration of the obligation.
That the debtor is declared to be in an arrangement of creditors.
That the debtor is prosecuted for the crime of property seizure.
That the obligations have been the subject of a legal claim or are the subject of a legal dispute or arbitration procedure on the settlement of which their collection

With regards to IRPF: if it is a natural person, all the expenses necessary to obtain it will be considered as a deductible expense for the determination of the net turnover of the lease. Among these expenses, Article 13. e) of the Spanish Personal Income Tax Regulation establishes:

The balances of bad debts provided that this circumstance is sufficiently justified. This requirement shall be deemed to have been met:

When the debtor is in a situation of bankruptcy.
When more than six months have elapsed between the time the taxpayer’s first request for collection and the end of the tax period and there has been no renewal of the credit.

If you have any doubts regarding this topic, we recommend that you contact reliable professionals, lawyers and economists who are experts in tax regulations. At Ruiz Ballesteros we will be happy to help.

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Javier Ortega

Javier has a degree in “Dirección y Administración de Empresas” (Business Management and Administration) from University of Malaga, he specialized in accounting and tax advice working in an office of recognized prestige for more than 16 years, joining Ruiz Ballesteros in December 2017 after the merger by absorption of Carrillo Asesores by Ruiz Ballesteros. He has developed his career as an internal consultant for companies and since 2003 as an external consultant, performing tasks of accounting, taxation and commercial law of companies from very diverse sectors. It has also been responsible for accounting a taxation of individuals, making quarterly fiscal statements of self-employed, as well as income statements, both residents and non-residents. His training is continuous through the development of different specialization courses. He speaks English and currently performs accounting and tax control tasks for groups of client companies.