When buying urbanised land, a very clear distinction must be made between the two important taxes that can be applied, of which one excludes the other.
It is important to know that it is possible to apply VAT on the purchase of a plot of land, as the VAT paid on the purchase can be then compensated with the VAT charged after selling the property built on the same land or even asking for the refund of the VAT paid on the purchase. Although you should be aware that it is not possible to ask for compensation or a refund in the case of Transfer Tax and Stamp Duty, under the modality of Taxable Property Transfers.
The first step is to differentiate between rustic land and urban land, article 20 of the VAT Act says that “the transfer of rustic land and all other unbuildable land will be exempt from VAT”.
Land is considered to be buildable if it is classified as buildable land under the Land Law and other planning legislation, and also if it suitable for building after obtaining a construction license from the Authorities.
Although this exemption does not extend to a transfer of land that is urbanised or is in the process of being urbanised (even if it is not classified as buildable land), except if it is exclusively intended for public parks and gardens or roads.
So, the question is, do we or do we not apply VAT?
For all the reasons set out above, in principle and having complied with certain other requirements, the transfer of a plot of land that is urbanised or is in the process of being urbanised will be taxed with VAT which, according to articles 90 and 91 of the same VAT Act, will be the current rate of 21 %.
So, we would have to consult the Land Law and the planning legislation of each city to see whether the land is urbanised or in the process, or if it is classified as a buildable site, because if it is not classified as buildable we could be talking about a case of VAT exemption.
When is a plot of land considered to be undergoing urbanisation?
There are many binding consultations from the General Directorate of Taxes, and rulings from different courts which make it clear that they will be considered to be undergoing urbanisation if money has been spent in order to carry out the first steps for the urbanisation of the land, in which case we will normally be talking about payments for earthworks, leveling, supply installations like electricity and water. These expenses must be borne by the seller, as they are to be carried out before the purchase of the land.
What are the other requirements for VAT to be applied to the sale?
Under the Value Added Tax Act, one of the main points to consider is that an operation will not bear tax if the person selling is not the taxpayer, which means that according to article 5 of the VAT Act, it must be a businessman or professional.
First we have to refer to article 5 of the VAT Act which will clarify who is considered to be a businessman or professional:
- People or companies engaged in business activities.
- Business companies, unless there is evidence to the contrary.
- Those who make one or more deliveries of goods or provision of services involving the use of a tangible or intangible asset in order to obtain continuous income.
In particular, persons renting properties or items will be considered as such.
- Those who carry out the urbanisation of land or the promotion, construction or rehabilitation of buildings intended, in all these cases, for sale, adjudication or transfer, even if this is carried out occasionally.
This means that in order to be able to charge VAT on the purchase, the seller must be considered the VAT taxpayer, or in other words, he must fall under the definitions of article 5 of the Act, otherwise a taxable event cannot take place under VAT, and therefore the sale will be subject to Transfer Tax and Stamp Duty, under the modality of Taxable Property Transfers. The percentage to pay in the case of a Taxable Property Transfer in the Region of Andalusia would vary between 8, 9 or 10 %, depending on the purchase price of the land.
Also, the taxable event has to take place under VAT, which is outlined in article 4 of the VAT Act, which says that, “all deliveries of goods carried out within Spanish territory by businessmen or professionals as considered in Article 5, whether regularly or occasionally, in the course of their business or professional activity will be considered as taxable operations.
In any case, business activity is considered to have taken place if goods are delivered by a company that has the status of a business undertaking and if any asset is sold that forms part of the taxpayer’s business assets”.
Therefore, if the person selling the urban land is an individual who is not acting as a businessman, then it is not possible to charge VAT on the sale of the urbanised land, so in this case the operation must be taxed as a Taxable Property Transfer under Transfer Tax and Stamp Duty.
Please note that the Law says that whoever carries out the urbanisation process of the land will be considered a businessmen or at least an occasional businessmen, even if he has not been registered as such, as there are many decisions from the courts on this subject which support the view that a person is considered a businessmen for these effects if he has urbanised a plot of land and spent money on doing so, even if he did not realise he had been acting as such, as the fact of ignorance of the law does not mean he did not carry out the actions required for urbanizing the land. Although the best way to create the necessary evidence, is to register the owner of a plot of land undergoing urbanisation (if it is an individual) under some heading of the Tax on Economic Activities which will enable him to sell the land as a businessmen, whether as an estate agency, property development, sales transaction or any other activity in the sector which could help support our view.
Finally, if we know that the sale of a plot of land that is urbanised or is in the process of being urbanised is being carried out by a businessmen, the operation will be taxable and not exempt from VAT, so in this case we must sell the land applying 21 % VAT, without the possibility of waiving the exemption (we will talk about the waivers and exemptions in another article).
However, it will be interesting to see how to take advantage of this taxation under VAT or how to apply for a refund of the VAT paid on the purchase, which we will discuss further in the next article of this same magazine.
Note: each operation must be studied carefully and individually, without making comparison with other cases even if they are similar. These articles are opinions on taxation issues and cannot be considered as a guide, we recommend you to always contract the service of a professional.