VAT in the construction and rental properties

Continuing on from our previous article, let´s assume that we are a company, that first we bought 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.

First of all, we shall clarify the VAT on the construction invoices:

In October 2012, there was a change in the Law, amending paragraph 2 of article 84 of the VAT Act.

Up until then the taxpayer 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 pay the tax into the account of Hacienda (Spanish Inland Revenue). But due to the bankruptcy of so many construction and development companies that took place between 2008 and 2014, the legislators decided to change this point, so now the taxpayer in some operations could be the entrepreneur who receives the goods or the service, so in this way Hacienda had the assurance that they would not have to refund VAT amounts to bankrupt companies or to avoid situations where a company receives amounts for VAT and then is unable to pay those amounts to the Inland Revenue due to having insufficient funds at the time of making their periodic VAT returns.

This way the letter f) of sub-section 2 of article 84 of the VAT Act has been changed, so now this means that the entrepreneur for whom the operation is carried out will be the taxable person 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 urbanization 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´.

Which means that, in practice, all the invoices received by the development company (owner of the land) from the building company, will include both output and input VAT, which effectively means not having to pay VAT on all the construction invoices, with the condition that this has been previously agreed and having signed these conditions in a contract between the developer and the contractor for the construction of the properties. Similarly, the same will apply to a constructor who subcontracts other professionals to carry out part of the work (let’s assume that he does not have an electrician in his employ and he subcontracts this service), he will still be receiving invoices where he does not have to pay VAT.

This way, it is clear that the developer is paying input VAT during the construction, even though he is not paying it in the invoices or certifications received from the constructor, which means he will have the right to deduct the amounts of VAT paid and also compensate these amounts with the VAT charged at the moment of the sale or rental of the built properties.

Regarding VAT for the rental of the built properties:

Now the company owning the land which once the building works have finished, will be the owner of 10 apartments, has the obligation to sell or rent the properties with VAT. Why with VAT? Below we will answer this question:

In the case of renting the apartments, the company must bear in mind that if they want to continue deducting the VAT paid and also be able to apply for the refund of the amounts paid during the construction, they have to rent out the properties with VAT. But this can give rise to a problem. Why? Well because the rental of properties, in principle, is exempt from VAT when the property is going to be used for residential purposes (article 20. One. 23rd, paragraph b of the VAT Act), which 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 the VAT paid during the construction is not deductible and not admit the refund of the full amount of the VAT paid, which would 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 requested for refund, then we could be talking about a very large penalty.

So, the solution will be to sell or rent out the apartments with VAT. Below we will see what options we have to rent out the apartments with VAT, so that we can keep our right of deducting it and a possible refund of the amounts paid.

To rent with VAT, we have the following different options:

  1. We rent out the property to a company without indicating in the contract that the property will be used as the regular place of residence for a particular person. This way the tenant is a company so then we will charge VAT in the rental
  2. We rent out the property as a business office, and include this use in the contract, this way the use of the property will not be as a home, for which VAT is charged and also a withholding is 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 can rent out the property as a holiday apartment offering catering services, this includes: washing clothes, making beds, offering breakfast services, lunch, room cleaning and sheet changing. To offer these services we must have at least one person employed who will be in charge of these jobs, as 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 reads the regulation as they personally understand it.

It is evident that all of this legislation can have different points of view and above all different applications. This is why it is essential to have tax planning for every company operation that could  involve us in all these different taxes and regulations.  This is why, as we always say, you should contact professionals to receive their advice.

Jesús R. Ballesteros

Jesús is Economist and Lawyer. He studied “Licenciatura de Economía´´ (Bussines and Financial Degree) at the University of Navarra, and is “Máster en Tributación´´ (Master Degree in Taxation) by Garrigues (Multinational Company of Legal Services), where he started to work at their office in Granada. After this, he worked for two well-known multinational companies, while he studied “Derecho´´ (Legal Degree) in Madrid until he finally opened Ruiz Ballesteros Lawyers and Tax Advisors at the beginning of 2006.Jesús is a frequent collaborator of Radio Intereconomía at their program “Foro Fiscal´´, this program is based on tax advisement, Cadena Ser and Ondacero.He wrote a Thesis at the University of Granada which he then defended before the correspondent court, obtaining the DEA in Financial and Tax Law. The title of his Thesis: “Intercambio internacional de información tributaria y Paraísos Fiscales´´ (International tax information exchange and Tax Heavens), this makes clear that he is one of the few that have delved into this aspect of the law, and this makes it easier for him to deal with all issues related to international taxation.He is the author of the book “ Como rentabilizar tu declaración de la renta´´ (how to render your annual personal income-tax) and he is the ideologist and developer of the first legal App in Spain. Paxtum, where you can download models of all kind of legal documents.Professor of the “Instituto Superior del Derecho y Economía´´ (Institute of Law and Economics) (ISDE), in the areas of Commercial Law and Tax and Financial Law, he is co-author of their theoretical books in both areas as well as their book of “practical cases” in Financial and Tax Law.He is an expert in the Spanish taxation system, international taxation, and corporate-commercial law. He speaks English and is the Founder and Director of our company. Ruiz Ballesteros Lawyers and Tax Advisors.

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