Spanish VAT Reciprocity Principle

Traditionally, Spain provided for VAT refunds to taxable persons from non-European countries (i.e. 13th Directive Refund request) on the basis of the so called Reciprocity Principle. Only taxable persons established in a jurisdiction which entered into a reciprocity agreement[1] with Spain can in principle claim a VAT refund.

As of September 15th 2015 however, Spain allowed for various exceptions to this reciprocity principle. From this date the Spanish input VAT relating to a number of transactions is refunded by Spain to companies in all non-European countries[2].

VAT leakage

As a result of the Spanish reciprocity principle, non-EU based companies are generally not entitled to a refund and will thus face a VAT leakage on their Spanish input VAT.

In this regard, we note that, for instance US based companies, are also not entitled to obtain a VAT refund in Spain, on the grounds that Spanish companies are not entitled to obtain a refund of US sales tax. This has been confirmed by the Spanish Tax Authorities in several binding rulings.

Brexit

As a result of Brexit, and the subsequent ending of the transitional period on December 31st 2020, the territories of the UK are no longer part of the European Union. Nevertheless, Northern Ireland will remain to be regarded as part of the European Union for purposes of the supply of intra-Community acquisitions and import of goods, and not in case of services.

Reciprocity with the United Kingdom relating to the refund of Spanish VAT for UK companies

One of the relevant aspects triggered by Brexit since 1st January 2021 is the refund of VAT in case of non-established UK companies operating in Spain. Under the Spanish regulation regarding the recovery of VAT, in case of third country applicants the VAT refund is conditioned by the following:

• Appointment of a local tax representative in Spain.
• Existence of reciprocity formally acknowledged via resolution issued by the Directorate General for Taxation (hereinafter “DGT”).

In this sense, this January, the Spanish Official Gazette (B.O.E.) published the resolution of January 4th 2021, of the Spanish DGT, relating to the VAT refund for businesses established in the territories of the United Kingdom of Great Britain and Northern Ireland.

For the full text (in Spanish) of the resolution, please see here.

The resolution recognizes the existence of reciprocity with the United Kingdom for the purposes of Article 119 bis of the Spanish VAT Law (i.e. the so called 13th Directive refund procedure) and consequently, UK companies will be entitled to claim the refund of their Spanish input VAT charged under the conditions set out in beforementioned Article 119.bis.

In this regard, we point out that this resolution targets taxable persons established in the United Kingdom, which are not (also) established in the EU, the Canary Islands, Ceuta or Melilla. Furthermore, as Northern Ireland will be part of the territory of the European Union for purposes of supplies, intra-Community acquisitions and imports of goods, separate rules will apply for Northern Ireland based companies (Ref: below).

However, since the UK Tax Administration has established certain limitations for refunding UK input VAT charged to Spanish companies, based on the Reciprocity Principle, the Spanish Tax authority has established the same limitations for UK businesses. Therefore, UK companies cannot obtain the refund of Spanish VAT on the following goods and services and, vice versa:

a) The acquisition of goods and services which are not used for economic activities.;

b) The acquisition of goods and services that are intended to be resold;

c) The acquisition of goods and services that relate to entertainment or services of a recreational nature.

d) The acquisition of motor vehicles.

e) The lease (operational or financial) of a motor vehicle, limited to 50% of the input VAT.
 

Right to obtain a refund of Spanish input VAT

Following the above, UK-based taxable persons are entitled for a refund of the Spanish input VAT incurred on any transaction different than the ones listed above, assuming that the UK companies comply with all the formalities set out on Article 119 bis of Spanish VAT Act and  to obtain such a refund following the procedures laid down on Article 31 bis of the VAT regulations.

Northern Ireland

As mentioned, while the protocol agreed for Northern Ireland in the Trade agreement remains in force, this territory will  be treated as part of the European Union for purposes of the VAT refund related to acquisition of goods and imports. As a consequence of this, taxable persons established in Northern Ireland will be entitled to a full refund of Spanish input VAT incurred on their transactions in Spain under the same conditions as EU companies.

However, with regard to Spanish input VAT relating to services acquired by taxable persons established in Northern Ireland, rules provided for Non-EU companies will apply.

Alternative Approach

In the event that a UK based company indeed faces VAT leakage as a result of the Spanish reciprocity principle, we recommend reviewing to what extent alternative supply chains can be used.  For instance, by having an EU based group company take control over any projects, business lines and or costs that need to be incurred in Spain. As pointed out, the Spanish reciprocity principle only applies to taxable persons who are not established in the EU.

We want to emphasize, however, that the mere interposing of an EU group company, as such, does not necessarily prevent the VAT leakage caused by the reciprocity principle. Given the fact that the Spanish tax authorities (hereinafter “STA”) on a number of occasions have ruled against “artificial supply chains”, we strongly recommend to thoroughly review to what extent the EU interposed group company effectively intervenes in the supply of goods. At this point, it is important to mention that proving the linkage or affectation of the input VAT quotas which refund is requested by the EU company, is a determining factor for the VAT refund. This means that, if the EU company does not act as an authentic operational centre (which delivers goods and/or provides services), but rather the UK entity does, the probability of rejection of the VAT refund is high.

As an alternative, UK taxable persons could in theory also avoid the VAT leakage of Spanish VAT resulting from the reciprocity principle, by means of having a Spanish VAT FE (i.g. ownership or rental of a warehouse, which will trigger only a VAT FE). If such an approach would be feasible, we recommend to further review the possibilities and the impact on the overall VAT and (EU and UK) CIT position of your company.

Fiscal Representative

As of January 1st 2021, in accordance with the provisions of the 13th VAT Directive, taxable persons applying for a VAT refund in Spain need to appoint a fiscal representative. This fiscal representative needs to be established in Spain and comply with all the formal obligations of the refund procedure. The fiscal representative will be held jointly liable in case the Spanish VAT is improperly refunded.