SPAIN

Indirect Tax News - October 2020

Financial transactions - pro rata calculation

The Spanish High Court (Tribunal Supremo) published on 18 May 2020 an interesting judgment (the Telefonica Case). This judgment sets criteria for when certain financial operations must be included in the VAT proportional deduction calculation (the pro rata calculation), in particular, the sale of a subsidiary’s shares and the income from derivatives.

In the case at hand, the holding company sold shares of subsidiaries of the group but the company did not consider the transactions for the pro rata calculation of the VAT because it considered the sale of the shares as an incidental activity.

The Spanish High Court, however, concluded that the transactions made by the mixed-activity holding entity were essential and key for its economic activity, given that the activity of the mixed-activity holding entity is to develop the group’s strategic planning. Therefore, the sale of the shares must be considered for the VAT pro rata calculation.

Another issue raised by the case concerned the income on financial derivatives it had acquired from a financial entity to cover exchange/interest rate fluctuation risks. On this issue, the Spanish High Court agreed with the company and concluded that such income is not subject to VAT because the company merely acquired these financial products, thus it was not a financial entity that carries out the financial activity of dealing in derivatives. In other words, the financial derivative transactions were not related to its economic activity. Therefore, the income on the derivatives should not be considered for the VAT pro rata calculation. 

Amparo Sanchis
amparo.sanchis@bdo.es

Álvaro Gómez-Elvira
alvaro.gomez@bdo.es