The tax implications of buying and selling land to build and develop

This is the second in a (short) series of articles on buying urban land to develop on the Costa del Sol, focusing on the (value-added) tax implications of doing so as a Spanish company or professional developer.

If you’re considering purchasing a plot and developing a new property on the Costa del Sol, it’s worth knowing when you can offset the VAT you may have to pay, both at the time of purchase and during the construction process. We asked Adolfo Martos Gross, a principal at GAM Abogados, a leading local law firm with offices in Malaga and Marbella, for his advice for those thinking about making a business out of property development.

“Whenever urban land is sold by a Spanish company or professional seller, whoever the buyer may be, the sale price will always be subject to VAT, which is charged at 21%,” Adolfo begins. “But if the buyer is also a company or professional developer registered in Spain, they have the right to offset the VAT paid on purchase against VAT they are required to levy on the sale of products and services during the same fiscal period.”

The basic maths works as follows, he explains: if the total amount of VAT paid by a taxpayer in a single fiscal year is greater than the sum of VAT they charge during the same period, they can ask the Spanish Tax Agency (la Agencia Tributaria, better known as Hacienda) for a refund of the difference.

Merely requesting a refund, however, means Hacienda will first check the taxpayer’s records – independent of whether it is a company or an individual – and, if they suspect there is no real intention of doing business, will likely begin an inspection. The higher the refund requested, Adolfo notes, their higher the risk of inspection. This is especially true in Marbella, he adds.

Or, Adolfo says, a taxpayer can choose to retain the difference as tax credit, for a period of up to four years, to offset against VAT they may have to pay during future fiscal periods.

In the case of property development, if the buyer, and hence the owner, of the urban land in question is a Spanish company or professional developer, when building work is carried out by a contractor or construction company, any invoices issued are also subject to VAT. But, Adolfo notes, there are a number of special provisions that are worthy of note.

As a general rule, Adolfo says, the party that sells the product or service in a transaction is liable for payment of VAT to Hacienda, rather than the purchaser, although the purchaser is required to pay the corresponding VAT to the seller, on top of the sale price.

In the case, however, of construction done by one company on behalf of another, such as when a property developer has a contractor carry out work on their behalf, VAT is charged at the reduced rate of 10%, rather than 21%. The law also ‘inverts’ responsibility for payment, making the developer liable, if applicable, to both charge and pay VAT at the same time.

In practice, this means that, instead of a contractor charging VAT on top of an invoice issued to a developer, and the former being required to pay Hacienda, Adolfo explains, a developer can retain the amount of VAT payable on the contractor’s invoices issued during a fiscal quarter as ‘IVA repercutido’ and offset this amount as ‘IVA soportado’. This produces a zero-sum effect on cash flow, something, Adolfo concludes, is an advantage for any developer.

By Adam Neale | Property News | February 26th, 2016

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