Antonio Flores’ Blog

Taxes are a funny thing. One day you get a registered letter, sent via the post office, with a on the spot demand for €2 surcharge, and another day Mr. Roca, the brains behind the biggest corruption ring ever to hit the headlines, faces an €800 million fine for, among other counts, Tax Fraud.

Whatever your problems with the Tax Office are, small or big, I find a very worrying pattern among some professionals in the real estate business: they are still providing tax advice to people buying real estate in Spain and the VAT refund they are supposedly entitled to if they buy through a company.This Costa del Sol legal/tax-gossip is all the more dangerous as it openly despises the complexities and sophistications of VAT tax provisions.

I am talking about advice relating to VAT refund when buying plots of land or property, and is no small talk if one considers that it accounts for 8% (or 18% on plots of land), but also if we think that it can make the difference between buying or walking out of the real estate’s office.

This inexpert advice is presumably given out innocently, but the excitement it creates is not nearly as exciting as the tax officers’ desire to quash the application and return a letter with a fine equating to 50% of the VAT amount trying to be recovered!

This “Sonderbehandlung”, or Special Treatment, is reserved by the VAT officials to those they deem are trying to cheat the Tax Office and so the matter demands some adjustment in perspective. But this is only one side of the (horror) story, because we could also find that having paid VAT, and having been entitled to a refund, the seller of the plot or property who charged us the tax is not a trader and therefore not only will we struggle to obtain a VAT refund but also we will have to pay Transfer tax on top of the VAT!

So as to not bore readers, I will succinctly explain 3 real life case scenarios:

1. A property holding company buys a plot at La Mairena, Ojen, from a legitimate land trader with a view to develop it and sell the finalized property. The buyer claims a VAT refund and receives, by way of return letter, a rejection to the application and a fine of 50% of the VAT that the unsuspecting applicant was after, because the Tax Office, in a display of extreme distrust, considers that the company was never intended to be used to carry out a commercial activity, but rather only as a means to apply and obtain the VAT refund, since the property, they contend, was to be used as living accommodation for the owner of the company. The Tax Office concludes that the property holding company has no other property, no prior experience in construction, no offices (either owned or rented), no employees, is not registered with the Tax Office with a specific “epigrafe” (which is a communication made with respect to the activity the company intends to do) and is not proven that the property was intended to be sold through real estate agents (this particular requirement was used, by a client of our firm, to demonstrate in extremis the genuineness of the claim).
2. An individual buys plot of land at La Quinta, Marbella, and pays VAT for it (16%, now 18%). Some weeks later the Regional Tax Office sends a tax demand for Transfer Tax for an additional 8%, as it is determined that the seller should have not sold with VAT because he is not a property or land developing professional, in fact has, objectively, no business organization as such, and, consequently, the deal is subject to Transfer Tax and not VAT. Connected to the above is the situation whereby the buyer is a proper trader, buys with VAT and intends to claim it back. His surprise is massive when he is told he does not have an entitlement to a VAT refund but he stills has to pay Transfer Tax.
3. An import-export company based in Torremolinos buys a new flat and tries to shave off the VAT paid, alleging that the apartment is being used by the company to carry out its activity. Input VAT is deducted, but 1 year later a letter arrives indicating that application for a VAT refund was made irregularly and it has to be repaid. Applying the Lennartz UE doctrine, the applicant manages to keep 50% of the tax arguing that 50% of the apartment is used for business office purposes and the other 50% for private living purposes.

VAT is a complex tax and is the most visible example of the permanent war between the Spanish Inland Revenue and tax payers that merits an abrupt treatment, inspired by distrust, of the former on the latter. But also, VAT is the Inland Revenue’s obsession so careful when dealing with it.

Antonio Flores Taxes Spain Tax Office, Spain VAT, Spanish Inland Revenue, Transfer Tax