A decision released by Spain’s Supreme Court on 4 November 2024 marks a major step in the interpretation of the rules relating to the VAT taxable base in related party transactions.
According to article 79.5 of the Spanish VAT Law, the VAT taxable base in related party transactions should be the market value. If there are no comparable service transactions, the market value should be the total costs incurred by the entrepreneur or professional in providing the services. If such costs include the amortisation costs of an investment good, the question arises as to how this cost should be allocated to calculate the VAT taxable base.
The case before the Supreme Court involved a lease agreement for a hospital between two related foundations. The hospital owner took the position that its amortisation costs should be allocated according to the timelines in the accounting and corporate income tax rules. The Spanish tax authorities disagreed and disallowed the reduction in the taxable base, asserting that the calculation should follow specific VAT rules for adjusting deductions on investment goods. This dispute led to a series of appeals, with the tax authorities' position upheld by both the TEAC and the national court before the case reached the Supreme Court due to its broader implications for interpreting VAT rules.
The Supreme Court agreed with the tax authorities, stating that applying specific VAT rules contributes to ensuring VAT neutrality and equal treatment and avoiding distortions that could arise from using accounting criteria. This approach also guarantees that the total cost of investment goods is fully incorporated into the price of taxable transactions. The court emphasised that this interpretation is not novel. The special regime for VAT groups refers to article 107 of the VAT law for allocating the costs of investment goods and the Court of Justice of the European Union has upheld the validity of national legislation on deduction adjustments for determining the VAT taxable base, provided the fundamental principles of the harmonised system are respected.
The Supreme Court decision reaffirms that, in the absence of an explicit reference in the Spanish VAT law to accounting or corporate income tax rules, an interpretation based on VAT-specific rules must prevail. The court considers that the adjustment periods (five years for movable property and 10 years for real estate) are appropriate to ensure consistency between deductions taken and VAT charged, thus maintaining the neutrality of the tax.
The criterion established by the court clarifies an essential aspect of tax relations between related entities and sets an important precedent for applying article 79.5 of the Spanish VAT law.
Álvaro Gómez-Elvira
Maria Gonzalez
BDO in Spain
According to article 79.5 of the Spanish VAT Law, the VAT taxable base in related party transactions should be the market value. If there are no comparable service transactions, the market value should be the total costs incurred by the entrepreneur or professional in providing the services. If such costs include the amortisation costs of an investment good, the question arises as to how this cost should be allocated to calculate the VAT taxable base.
The case before the Supreme Court involved a lease agreement for a hospital between two related foundations. The hospital owner took the position that its amortisation costs should be allocated according to the timelines in the accounting and corporate income tax rules. The Spanish tax authorities disagreed and disallowed the reduction in the taxable base, asserting that the calculation should follow specific VAT rules for adjusting deductions on investment goods. This dispute led to a series of appeals, with the tax authorities' position upheld by both the TEAC and the national court before the case reached the Supreme Court due to its broader implications for interpreting VAT rules.
The Supreme Court agreed with the tax authorities, stating that applying specific VAT rules contributes to ensuring VAT neutrality and equal treatment and avoiding distortions that could arise from using accounting criteria. This approach also guarantees that the total cost of investment goods is fully incorporated into the price of taxable transactions. The court emphasised that this interpretation is not novel. The special regime for VAT groups refers to article 107 of the VAT law for allocating the costs of investment goods and the Court of Justice of the European Union has upheld the validity of national legislation on deduction adjustments for determining the VAT taxable base, provided the fundamental principles of the harmonised system are respected.
The Supreme Court decision reaffirms that, in the absence of an explicit reference in the Spanish VAT law to accounting or corporate income tax rules, an interpretation based on VAT-specific rules must prevail. The court considers that the adjustment periods (five years for movable property and 10 years for real estate) are appropriate to ensure consistency between deductions taken and VAT charged, thus maintaining the neutrality of the tax.
The criterion established by the court clarifies an essential aspect of tax relations between related entities and sets an important precedent for applying article 79.5 of the Spanish VAT law.
Álvaro Gómez-Elvira
Maria Gonzalez
BDO in Spain