Amounts excluded of the concept of compensation exempt for VAT


Spanish Supreme Court ruling, dated April 27, 2015, in response to the appeal by the company UFC, SA

UFC signed a lease of two land not classified as scheduled and integrated into an urban development program, the implementation of which would be two plots.

If the licensors of the right of purchase option fail to comply with their commitments, UFC could choose to terminate or enforce, “with compensation in each case for all damages actually incurred and the damages that without any accreditation is establish as a penalty, in the amount of two hundred million pesetas, both parties waive the penalty judicial restraint”.

Due to the existence of a register entry of seizure on farms under contract, UFC promoted an appeal against the lessors. The parties reached an agreement whereby the lessor undertook to pay the sum of UFC 7,813,157.36 euro.

UFC recorded on January 28, 2004 an extraordinary income of 7,813,157.36 euros, considering that sum as a compensation. On July they had made land subdivision projects comprising 80% of ground of the plots covered by the contract.

The Spanish Tax Authorities claimed an increase in the tax base declared of 7,813,157.36 euros, the general VAT rate of 16%, with a VAT quota of  1,250,105.18 euros, considering that first figure constituted remuneration of the provision of services unreported.

UFC argued before the Spanish Economic Administrative Court the compensatory nature of the full amount charged and, before his dismissal appealed claiming that at least, should be excluded from taxable income the amount of the penalty clause (1,202,024.21 euro).

The judgment of the Administrative Court, in part estimates the appeal on the understanding that a portion (1,202,024.21 euro) of the amount received would be considered as compensation, but the rest up to 7,813,157.36 euro are not a compensation but does constitute a retribution for the services provided.

The Spanish Supreme Court agrees with the view expressed in the ruling issued by the Administrative Court to mention that this court has not denied or has misinterpreted the legislative mandate contained in that article 78.Tres.1º of Spanish VAT Law, in which it is established “not be included in taxable base amounts received by reason of compensation, other than those referred to in the preceding paragraph which, by their nature and function not constitute compensation for deliveries of goods or services subject to VAT”. What happens is that the euro 6,611,133.15 were received by UFS without compensatory nature, this amount constitute payment of urban development operations carried out by UFC. Only the compensation agreed to 1,202,024.21 euros as a penalty clause in the contract is recognized.

For these reasons, the Spanish Supreme Court decided that there are not valid arguments for appeal.

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STS 27 04 2015

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