VAT deduction based on the likely destination of the assets acquired
Judgment of the Spanish Supreme Court dated on 27 September 2016, in response to an appeal in cassation for unification of doctrine.
The matter has its origin in a limited audit carried out by the Spanish Tax Authorities concerning the Spanish VAT return (303 form) corresponding to the fourth quarter of 2007 which was submitted by the Company RYLFER. In such it carried out a barter in that RYLFER conveyed a lot in Exchange for a series of buildings consisting of four houses to receive future with their respective seats of garage and 2 commercial premises and money advance. On the basis of such transmission, of which the delivery of the land operated as payment in advance, RYLFER paid a VAT quota of EURO 474,260.
Once the barter was done, RYLFER proceeded to the full deduction of the VAT quotas paid, by including them in the VAT return (303 form) corresponding to the fourth quarter of 2007.
However, in the opinion of the Spanish Tax Administration, the right procedure would have been to deduct only a VAT quota of euro 402,862 due to the fact that a VAT quota of EURO 71,400 would correspond to the acquisition of four houses and the four garage spaces, which would not be deductible since their likely destination would be any of these exempt transactions in the Spanish VAT Law: lease (art. 20. One.23.b) or sale (exempt for a second transmission article 20. One. 22), either their use the satisfaction of personal needs (non-deductible according to article 95.One and Two, of the same law). Without prejudice to its deductibility if that foreseeable destination was altered.
At this point, we would like to mention the content of the first paragraph of article 99.Two of the Spanish VAT Law:
“Deductions should be made based on the probable destination of goods and services purchased, without prejudice to its further rectification if that was altered”.
However, according to the opinion of the recurrent, the destination of the immoveable goods acquired by barter could be another different to the designated by the Spanish Authorities (lease, sale or satisfaction of needs personal) that is subject and not exempt to Spanish VAT, as it would be the of lease of personal employee of an entity or the lease to ENTREPRENEURS (medical, dentists, architects, etc…), not being able the Administration to prove the concurrence of the cases of exemption due to the fact that the immoveable properties have not been delivered yet.
From a formal point of view, the Spanish Supreme Court doesn’t appreciate identity between the case that concerns us and breaches in which bases the appellant this appeal for the unification of doctrine. Furthermore, the Court understands that there is a lack of evidence of a different destination of the goods to the one estimated by the Tax Administration, during wide time period that mediated between the acquisition and the completion of the performance of the limited audit, concluding that the fate of those particular goods were the exempt operations assumed by the Tax Administration by what the Court dismisses the appeal condemning costs to the appellant.