Spanish court rules on the application of VAT reverse charge on the delivery of real estate taxed with real charges

A ruling of Spain's Central Economic Administrative Court, dated 20 September 2022, considers that the reverse charge rule does not apply to the delivery of real estate by the owner as a security for a loan when the real estate is transferred to another businessman in exchange for a price that will be used to repay (totally or partially) the mortgage loan.

The third intent of letter e) of Article 84, paragraph 1, number 2 of Law 37/1992 on VAT of 28 December 1992 (the VAT Law) extends the reverse charge rule to real estate transferred in the case of an effective call on the guarantee and also when the transfer of real estate entails the subrogation of the acquirer to the debtor position of the obligation (mortgage subrogation) or the debt is extinguished with the purchaser's funds in such a way that the transaction involves the transfer of a debt-free real estate.

Scope of the reverse charge rule

However, the ruling of Spain's Central Economic Administrative Court  (TEAC) considers that this reverse charge rule should be limited only to those cases involving the foreclosure of the property, in line with the provisions of article 199.1.e) of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the VAT Directive). This allows Member States to provide that the VAT debtor is the recipient taxable person in "the supply of goods provided as security by one taxable person to another in execution of that security".

The ruling establishes that the delivery of real estate by the owner as security for a loan to another businessman in exchange for a price intended to repay (totally or partially) the mortgage loan is not covered by the reverse charge provisions of article 84, paragraph 1, number 2 of the VAT Law.

In this specific case, the property had not been delivered as the result of a foreclosure action or in exchange for the total or partial cancellation of the debt. It was the transferor who intended to repay the mortgage with part of the price obtained from the sale and the acquirer did not assume any obligation to cancel the debt, either totally or partially.

Thus the TEAC reiterates the criterion established in its ruling of 22 January 2015 (Ruling 5195/2013), which was contrary to the criterion applied by Spain's Directorate General of Taxation (DGT) according to the consultations V1415-13 and V1416-13 of 24 April 2013.

The DGT has maintained a broad interpretation in the cases of reverse charge in real estate transactions based on the transposition into Spanish VAT Law of Community legislation on the reverse charge rule.

Osborne Clarke Comment

In light of this recent TEAC ruling and in view of the uncertainty as to if, and to what extent, the Spanish legislation may overreach the authorisation granted by the VAT Directive, businesses should review in detail any real estate transactions which may be affected by the VAT reverse charge rule. An assessment should be made as to whether the reverse charge rule on the delivery of real estate should continue to apply to all the cases provided for in the current VAT Law or, on the contrary, whether its application should be restricted only to the cases provided for in the VAT Directive.

Further judicial pronouncements and any changes in criteria with respect to the previous doctrine applied by the DGT should also be kept under constant review because the TEAC's criteria are binding on the entire tax administration, the DGT included.