VAT Exemptions and Deductions: A Comprehensive Guide for Businesses

Posted on Oct 26, 2024 in Law & Jurisprudence

VAT Exemptions and Deductions

Transactions Exempt from VAT

Limited Exemptions

Transactions carried out domestically do not allow for the deduction of input VAT on acquired goods or services. Specific exemptions include:

  • Social, Cultural, and Humanitarian Exemptions: Healthcare, medical, hospital, and ambulance services; Welfare services (child and youth protection, elderly care, and special education); Educational activities; Socio-cultural activities.
  • Financial Exemptions: Insurance, reinsurance, and capitalization operations; Deliveries of legal tender and postage stamps (not exceeding face value); Financial operations excluding collection management and custody of effects.
  • Commercial Exemptions: Public postal services (excluding passenger transport and telecommunications); Lotteries, betting, and gambling; Supplies of undeveloped land; Second and subsequent deliveries of buildings; Residential leases.

Full Exemptions

Transactions with external entities are fully exempt, including:

  • Exports
  • Intra-Community supplies
  • Deliveries to the Canary Islands, Ceuta, and Melilla

VAT Deductions

The formula for calculating VAT deductions is: Output VAT (Collected) – Supported Input VAT (Deductible) = VAT Payable

Requirements for Deductions

  • The subject must be an entrepreneur or professional.
  • A declaration of commencement of activity must be submitted.
  • Input VAT must have been incurred within the country.
  • Goods and services must be related to the business activity (e.g., vehicles and other capital goods).
  • Operations must be taxable and not exempt.

Formal Requirements for Deductions

  • Possession of a full invoice
  • Invoices must be accounted for

Non-Deductible VAT Operations

VAT charged on the following is not deductible:

  • Travel expenses for entrepreneurs, professionals, or employees
  • Jewelry, food, tobacco, drinks, hotel services, restaurant bills, and entertainment expenses
  • Customer, employee, or third-party entertainment costs

VAT Settlements

Entrepreneurs and professionals selling goods and services must collect and remit VAT. Settlement declarations must be submitted periodically.

Documents and Deadlines

Businesses billing over €6,000,000 annually must file monthly. Others generally file quarterly.

Obligations

  • Submit a declaration of domicile
  • Issue and maintain complete invoices or similar documents
  • Keep accounts in accordance with the Commercial Code
  • Submit settlement declarations and pay the resulting tax amount
  • Apply for a tax identification number (CIF)
  • Maintain required logbooks

Record Book of Investment Goods

This book records acquisitions of movable and immovable property used for more than one year as working tools, excluding office equipment worth less than €1,202.02, accessories, spare parts, repairs of other capital goods, packaging, and personal clothing. Entries must be clear, accurate, chronological, without blank spaces, erasures, or alterations.

Special VAT Schemes

Special schemes exist for simplified VAT, agriculture, livestock, fisheries, the equivalence surcharge for second-hand goods, art, antiques, collectibles, travel agencies, used goods, and gold investment.

Special Equivalence Surcharge Regime

This regime applies to retailers and is mandatory for individuals or entities except for jewelry, gold, antiques, building materials, clothing, and leather. Features:

  • Retailers do not file VAT settlements or maintain VAT registration books.
  • The supplier charges the retailer the VAT and the equivalence surcharge.
  • Operates with limited exemptions, so input VAT is not deductible.
  • No obligation to issue invoices.
  • Retailers must demonstrate to suppliers that they are under this regime.

Operations Not Subject to VAT

  • Sale due to death and business cessation
  • Employee and officer wages
  • Free deliveries of goods with no commercial value and provision of services
  • Deliveries without consideration for printing or advertising
  • Services to worker cooperatives by partners
  • Grants and administrative authorizations
  • Delivery of money as payment

VAT Liability

VAT is payable upon the supply of goods, provision of services, intra-community acquisitions, and imports.

Taxable Person and Tax Repercussion

The entrepreneur or professional delivering the good or service, or the legal person making the acquisition or importation, is obliged to pass on the VAT through an invoice or similar document.