The VAT treatment of a sale and simultaneous leaseback of real estate with an option to repurchase has been a contentious issue in Spain, with differing interpretations on whether the arrangement qualifies as a VAT-able supply of goods or a single exempt financial transaction.
Spain’s Economic Administrative Central Court (TEAC) ruled on this issue on 26 November 2024, concluding that such an agreement should be categorised as a single financing agreement that is exempt from VAT rather than a supply of goods. However, this position is at odds with the position taken by Spain’s tax authorities.
The case before the TEAC involved a sale of immovable property to a bank and a simultaneous leaseback of the property to the seller, with an option to repurchase. Several years later, the seller-lessee executed the purchase option and recovered ownership of the property for which it deducted the VAT incurred on the acquisition. The seller sold the property to an individual in the next two years in a VAT-exempt transaction. During a tax audit, the tax authorities adjusted the VAT on the acquisition on the grounds that the property was transferred in a VAT-exempt sale that fell within the scope of Spain’s capital goods scheme (i.e., a mechanism that adjusts the amount of input VAT that can be reclaimed on high-value capital assets by spreading the initial VAT claimed on such assets over a number of years.)
The taxpayer appealed the tax authorities’ decision to the TEAC. In reaching its own conclusions, the TEAC relied on the 2019 decision of the Court of Justice of the European Union (CJEU) in the Mydibel SA case where the CJEU analysed the economic rationale of a leaseback arrangement and concluded that its purpose was to provide liquidity to the seller-lessee and, hence, should be regarded as a single financial transaction instead of two separate and independent supplies. With this ruling, the TEAC diverged from the tax authorities’ position, which regarded leasebacks as two separate transactions: a sale and a lease of property, both of which are taxable for VAT purposes. The tax authorities argued that the CJEU decision in Mydibel SA was not applicable as it involved a long-term or perpetual right and a lease of property, not a sale and lease.
The TEAC held that the determination of whether there is a supply of goods should be based on the EU VAT Directive and CJEU jurisprudence, which provide that a supply of goods does not refer to the transfer of ownership in accordance with the applicable national law but covers any transfer of tangible property by one party that empowers the other party to dispose of the property as if it were the owner. Such features are not present in a leaseback because the acquirer-lessor cannot act in the full capacity of an owner. As a result, the TEAC concluded that the leaseback arrangement is a financial transaction and, therefore, the tax audit could not adjust input VAT that had been incorrectly charged under the capital goods scheme.
The Supreme Court recently agreed to hear an appeal in a case involving the sale and leaseback of real estate to determine whether the arrangement qualifies as a VAT-able supply of goods or a single exempt financial transaction. A decision by the highest court in Spain should resolve the conflicting treatment of sale and leaseback arrangements and provide certainty for both taxpayers and the authorities.
Verònica Targa
BDO in Spain
Spain’s Economic Administrative Central Court (TEAC) ruled on this issue on 26 November 2024, concluding that such an agreement should be categorised as a single financing agreement that is exempt from VAT rather than a supply of goods. However, this position is at odds with the position taken by Spain’s tax authorities.
The case before the TEAC involved a sale of immovable property to a bank and a simultaneous leaseback of the property to the seller, with an option to repurchase. Several years later, the seller-lessee executed the purchase option and recovered ownership of the property for which it deducted the VAT incurred on the acquisition. The seller sold the property to an individual in the next two years in a VAT-exempt transaction. During a tax audit, the tax authorities adjusted the VAT on the acquisition on the grounds that the property was transferred in a VAT-exempt sale that fell within the scope of Spain’s capital goods scheme (i.e., a mechanism that adjusts the amount of input VAT that can be reclaimed on high-value capital assets by spreading the initial VAT claimed on such assets over a number of years.)
The taxpayer appealed the tax authorities’ decision to the TEAC. In reaching its own conclusions, the TEAC relied on the 2019 decision of the Court of Justice of the European Union (CJEU) in the Mydibel SA case where the CJEU analysed the economic rationale of a leaseback arrangement and concluded that its purpose was to provide liquidity to the seller-lessee and, hence, should be regarded as a single financial transaction instead of two separate and independent supplies. With this ruling, the TEAC diverged from the tax authorities’ position, which regarded leasebacks as two separate transactions: a sale and a lease of property, both of which are taxable for VAT purposes. The tax authorities argued that the CJEU decision in Mydibel SA was not applicable as it involved a long-term or perpetual right and a lease of property, not a sale and lease.
The TEAC held that the determination of whether there is a supply of goods should be based on the EU VAT Directive and CJEU jurisprudence, which provide that a supply of goods does not refer to the transfer of ownership in accordance with the applicable national law but covers any transfer of tangible property by one party that empowers the other party to dispose of the property as if it were the owner. Such features are not present in a leaseback because the acquirer-lessor cannot act in the full capacity of an owner. As a result, the TEAC concluded that the leaseback arrangement is a financial transaction and, therefore, the tax audit could not adjust input VAT that had been incorrectly charged under the capital goods scheme.
The Supreme Court recently agreed to hear an appeal in a case involving the sale and leaseback of real estate to determine whether the arrangement qualifies as a VAT-able supply of goods or a single exempt financial transaction. A decision by the highest court in Spain should resolve the conflicting treatment of sale and leaseback arrangements and provide certainty for both taxpayers and the authorities.
Verònica Targa
BDO in Spain