Binding tax ruling concerning the VAT treatment of the urban development of lands by private individuals who are undivided co-owners. Reverse charge case


The opinion expressed by the Spanish General Tax Directorate (DGT) is useful to recall the treatment for VAT on real estate transactions involving the promotion of the construction of buildings by several co-owners, since besides clarifying whether the commoners or individuals are the ones who act as entrepreneurs or professionals, it remembers the new rule of reverse charge for these transactions.

The consultants are several individuals who are co-owners in undivided of urban lands, who have signed a contract with a company, whose capital is wholly owned by most of them, to build buildings on such lands.

The DGT starts mentioning that the entrepreneurs or professionals shall be considered under article 5.1.d) of the VAT Act, as those “who made land development or the development, construction or rehabilitation of buildings for, in all cases, sale, adjudication or assignment for any reason, even occasionally”. Furthermore, the article 84.Thress declares as taxable persons the inheritance in abeyance, a community property and other entities without legal personality that constitute an economic unit, when performing taxable transactions.  Therefore, at first, it seems to be clear that it is the commoners who make a taxable transaction.

However, the DGT does remember that it is a criteria reiterated by said center, to do not consider as taxable person to the community if there is not a joint assumption of risk and fortune of the activity by the commoners, but to the extent that they are the components of the business community who assume the consequences of the activity, it will be the latter, where appropriate and individually considered, those conducting the transactions subject to VAT.

In this case, although each one of the individuals is separately registered in the activity of urban developer, it seems that the development and construction activity will be jointly developed, assuming the risk and benefits of the transaction jointly by what will be the community, who consequently will have the status of taxable person for VAT.

But do not forget that the VAT Act has regulated certain cases where the reverse charge will apply, and that happens with the provision of the article 84.One.2º.f), where the taxable person is the recipient of the transactions:

“In the case of execution of work, with or without provision of materials and supplies of staff for its implementation, as result of direct formalized contracts between the developer and the contractor aimed at the development of land or the construction or rehabilitation of buildings.

The provisions of the preceding paragraph shall also apply when the recipient of the transactions are in turn the main contractor or other subcontractors in the above conditions”

Therefore, to the extent that i) the community is an entrepreneur or professional, ii) the transaction consists of an execution of works for the construction of a building (in this case) and iii) formalizing the contract between the developer and the contractor, it will be the community itself the taxpayer of the transaction, being obliged the community to communicate reliably that he is acquiring the goods or services as an entrepreneur or professional.

This ruling and the treatment given to the transaction is an example of the legal and tax complexity that normally represent real estate transactions, which together with the large amount of money involved, make it advisable to perform a preliminary analysis to determine the correct VAT treatment involving this, in order to avoid future tax contingencies for VAT.

Attached is a copy in Spanish of the Binding Tax Ruling number V1371-15.

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