Anyone buying a new-build property in Spain will generally pay 10% VAT. In principle, there is no right to a deduction when you buy a new construction in Spain as an individual. So it is basically a transfer tax.
However, there is an exemption regime for certain tourist properties. This article provides more information on the conditions of the right to VAT deduction.
1. The legal qualification for VAT recovery in Spanish new construction
Spanish VAT law states that residential property rentals are exempt from VAT. However, a VAT exemption also means that the buyer is not entitled to deduct the VAT paid at the time of purchase.
The exception is rentals where ‘services specific to the hotel sector’ are provided. If these services are present, the letting is subject to VAT (usually 10% for residential property)and the right to full VAT recovery arises. VAT is only recoverable if the buyer qualifies as an ‘entrepreneur’ within the meaning of VAT legislation. This requires that the rental is not considered purely a property rental, but an economic activity with hotel services.
You can read more about the buying process for new builds here.
Servicios complementarios propios de la industria hotelera‘ 2.’
According to the Spanish tax authorities and various binding consultations, hotel services must be substantial to break the exemption. For example:
- Reception and reception of guests.
- Periodic cleaning during the stay (not only at check-out).
- Change of bed and bath linen on a regular basis.
- Other services such as catering, surveillance or technical assistance.
If the owner only hands over the keys and arranges the final cleaning, the tax authorities consider this an exempt activity and VAT recovery is refused.
3. The 10-year review period
In Spain, immovable property qualifies for tax purposes as ‘bienes de inversión’ (investment goods). A review period of 10 calendar years (the year of purchase plus the following nine years) applies to such property.
- The rule: You must continuously use the property for VAT-taxed rentals during these 10 years.
- The sanction: If you sell the property within this period (without VAT) or use it for private purposes, you must repay the recovered VAT to the tax authorities on a pro rata basis.
4. Operational structure and operation
To effectively recover VAT, the investor must register with the Spanish tax authorities and submit quarterly VAT returns.
They often work with a professional operator. In this case, the owner rents the property to the operator. The VAT rate is then 21% VAT, as it is a rental to a legal entity with no residential purpose. The operator, in turn, rents to tourists (subject to 10% VAT with hotel services). This structure guarantees the owner's right to deduction.
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5. Can you still use the property yourself?
When an investor in Spanish new-build property recovers VAT on the construction, a direct link arises between the right to deduction and the effective operation of the property. The Spanish tax authorities allow own use, but this directly affects the extent of the deduction and compliance with the review period.
Legally, there is a strict separation between a residential property and an investment property in tourist operation. If the owner owns the property as a primary residence (residencia habitual) uses, the qualification of ‘economic activity’ immediately lapses. This leads to a full review in which all VAT recovered must be refunded, plus default interest.
If you wish to use the property for your own holiday, there is no maximum statutory time limit that determines how long you can use the property yourself. Thus, there is in Spanish law no fixed maximum term (such as “maximum 4 weeks”) that determines when you lose the right to VAT deduction. Instead, the tax authorities apply the principle of proportionality.
If you use the property yourself for part of the year, this is considered ‘private consumption’ or ‘autoconsumo’. For that part of the time, the property is not connected to VAT-taxed transactions. This has two consequences:
- Initial deduction: In principle, you may only recover VAT pro rata the percentage that the property is used for taxable rentals. Do you stay there yourself for 2 months (16.6%) and rent out 10 months? Then in theory, only 83.4% of VAT is deductible.
- Annual correction: During the 10-year review period, you must test the actual ratio of own use to rental each year. If the own use in a given year differs significantly from the year of purchase, you must make a correction in your VAT return.
6. Risks in case of excessive self-use
Although there is no statutory maximum period for personal use, excessive personal use (e.g. more than 3-4 months per year) attracts the attention of the inspectorate. The tax authorities may then argue that the ‘economic affectation’ of the property is secondary to personal enjoyment. If the tax authorities rule that there is no actual entrepreneurial activity, the full right to VAT deduction may be refused retrospectively. In that case, you also risk penalties.
7. The ‘Hotel method’ as an alternative
To avoid the administrative complexity of annual pro rata calculations, the following structure is often used in practice:
The owner ‘rents’ his own property from the operator (or bills to himself) at a market rate, including 10% VAT and mandatory hotel services.
- Advantage: The property remains in the VAT circuit (taxed sphere) 100% of the time.
- Consequence: The initially recovered VAT is retained (no revision needed), provided you effectively remit the VAT on your own stay to the tax authorities.
8. In practice
When you purchase such a project, you sign an operating agreement with the manager of the complex in addition to the purchase agreement. The manager (‘operator’) will then take care of the rentals and provide hotel services. In such exploitation agreement, the conditions for own use are also mentioned. Thus, the contract may well impose additional restrictions such as, for example, a maximum own use of 4 weeks per year and no possibility for own use during the high season.
Opinion
If you opt to invest in a VAT-recovery project, it is important to know that there will be restrictions on owner-occupancy. Such projects mainly serve as revenue property and not as a private or holiday home for the owner. If you do wish to use the property as your own holiday home, there may be financial consequences such as losing the right to VAT deduction and possibly a VAT penalty.
Make sure you fully understand all the terms and conditions of the project before committing to purchase. The operating agreement may include various conditions in terms of rentability, own use and costs.
