SPAIN - VAT rate applicable to property acquisitions
On 28 January 2019 the Spanish Directorate General of Taxation (DGT) ruled on the VAT rate applicable to different investment structures used by a company in the real estate sector.
The ruling was sought by a stock exchange-listed company that is engaged in renting out properties and subject to specific financial regulations (SOCIMI). The company intended to structure its investments by either acquiring or incorporating non-listed companies. These non-listed companies would also be engaged in renting out properties and will also be subject to the special scheme for Corporate Income Tax purposes (the so-called EDAV scheme) that provides an 85% reduction on rental income where the company holds more than eight properties that are rented for more than three years.
Spanish VAT law provides that residential properties acquired by companies that fall under the EDAV scheme may be taxed at a 4% VAT rate instead of the 10% VAT rate commonly applied to transfers of residential properties. To qualify for this reduced VAT rate the future rent of the acquired property must be subject to the 85% reduction.
In the ruling, the DGT concluded that recently incorporated companies may ask for the 4% VAT rate even if the companies have not fulfilled all the requirements to apply for the EDAV scheme as of the time of transfer of the properties to those companies. The DGT made it clear, however, that there must be objective evidence at the moment of acquisition that the company has the intention of renting the properties under the specifications of the EDAV scheme.
The listed company that sought the ruling also asked for clarification about whether the 4% VAT rate should be adjusted to the 10% rate if the acquirer of the properties merges with another company after the property acquisitions are completed.
On this question, the DGT ruled that corrections may not be claimed where the company is taxed under the EDAV scheme and it has applied the 85% reduction and the company resulting from the merger completes the minimum rental period of three years. But, if the merger takes place before the company closes its first fiscal year under the EDAV scheme and the company resulting from the merger applies a tax scheme incompatible with the EDAV scheme, a correction of the VAT rate may be claimed, since the 85% reduction cannot be applied.
This ruling makes it clear that, provided the requirements for the EDAV scheme are satisfied, the DGT accepts application of the 4% VAT rate by recently incorporated companies under the EDAV scheme and by merged companies.