When to apply VAT on the sale and purchase of developed land

A company applying VAT on the purchase implies that the VAT borne can be compensated with the VAT charged when selling buildings constructed on the land, or perhaps requesting a refund of the VAT borne. However, it is not possible to compensate anything, nor ask for a refund, if the tax to be paid is the ITP-AJD, in its modality of Onerous Property Transfer (hereinafter, TPO).

The first thing to do is to distinguish between rural and urban land, since “the supply of rural land that is not buildable, including the buildings on it, is exempt from VAT”.

This exemption does not extend to supplies of urbanised land or land in the process of urbanisation (even if they do not currently have the status of buildable land), so it is important to take into account the classification of the land in each city to check whether it is urbanised or classified as buildable land. Without the status of buildable land, the purchaser could face a VAT exemption.

When is land considered to be in the process of urbanisation?

According to case law, land is considered in the course of urbanisation when the seller has spent money on actions to try to make the land developable; for example, earthworks, smoothing, or the installation of electricity and water supply.

What are other requirements to be fulfilled for the transfer to bear VAT?

With VAT there can be no accrual if the transferor is not a taxable person; and the taxable person is a business person who is an individual defined by article 5 LIVA, which clarifies that they will be considered as a business person or professional as follows:

1. The entity carries out business activities.
   
   
2. The entity is a commercial company, unless proven otherwise.
   
   
3. Those who carry out one or several deliveries of goods or rendering of services that involve the exploitation of a tangible or intangible asset with the purpose of obtaining continuous income over time. In particular, the lessors of goods shall be considered as such.
   
   
4. Those who carry out the urbanisation of land or the development, construction or rehabilitation of buildings intended, in all cases, for sale, adjudication, or assignment by any title, even occasionally.

Therefore, if the individual transferring the urban land is a natural person who is not acting as a business person, then it will be impossible to charge VAT on the transfer of the urbanised land and therefore it must be taxed under the TPO modality of the ITP-AJD.

Finally, if the sale of urbanised land or land in the process of urbanisation is made by a business person, then it will be subject to VAT and not exempt, so it must be sold with a 21% VAT rate, without the possibility of applying any waiver of the exemption.

Note: Each transaction must be studied individually.

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Jesús Ruíz Ballesteros is the Founder and Director of Ruiz Ballesteros. Holding an undergraduate degree in business and finance, a master’s in taxation, and a degree in law, Jesús is an innovative entrepreneur and an expert in the Spanish taxation system, international taxation and corporate commercial law. He is also the developer of Paxtum, the first legal app in Spain. In 2018, Jesús Ruíz Ballesteros was awarded the Cruz Blanca for Civilian Merit by the Ministry of the Interior of Spain. 

In 2018, Jesús Ruíz Ballesteros was awarded the Cruz Blanca for Civilian Merit by the Ministry of the Interior of Spain.