DGT confirms that the VAT on agreed discounts may only be avoided if rent prices are renegotiated before they are payable

Spain - 31 / 05 / 2020

Spain Tax Commentary

As we reported in our commentary dated April 11, 2020 (read here), in the current health crisis commercial lease agreements are being renegotiated due to force majeure.

In the field of VAT we recalled that leases are classed as a service of an ongoing nature, which means that VAT becomes chargeable, as a general rule, when the rent is payable, even if the lessee does not pay the owed amount. Under the interpretation given by the Directorate General for Taxes (DGT) in earlier resolutions, only a change to when the rent is payable is able to prevent the tax becoming chargeable, provided that change is expressly agreed.

If the change is not negotiated then, the tax will become chargeable, even though the taxable amount may later be modified (i) if subsequent discounts or reductions are granted, or (ii) if a rent default takes place; although a procedure needs to be implemented that requires correction invoices to be issued, plus, where there has been a rent default, a specially defined procedure for these cases.

In its recent resolution V1467-20, dated May 19, 2020 (referring to renegotiations of lease agreements as a result of COVID-19), the DGT reached the same conclusion.

The specific case concerned an individual leasing out commercial premises in which a hospitality business was conducted who agreed to a 50% rent reduction with the lessee company. The DGT referred to the rules regarding the VAT on services of an ongoing nature, to conclude that “only where the contractual relationship is canceled temporarily or the time when the price becomes payable is changed will value added tax cease to be chargeable”. Therefore:

If the partial forgiveness of rent takes place before or simultaneously with when the rent becomes payable, it must be regarded that the new rent has been reduced by the relevant amount, and therefore, the discount will not be part of the taxable amount of the transaction.
If that forgiveness is covenanted after the rent is payable, VAT will become chargeable and therefore must be charged on the whole amount of rent, despite the forgiveness covenant. In these cases, he VAT relating to the discount may be recovered in the procedure for reduction of the taxable amount, although only if the requirements allowing that reduction are met.