Spain’s National Court has taken an important step in the evolution of the VAT treatment of vehicle rental contracts with three key decisions issued in March and April 2025 (PSA 19 March, Arval 2 April and Lease Plan 9 April) that address the controversial issue of whether insurance damage cover should be treated as an autonomous service exempt from VAT or as a VATable ancillary service included in the rental contract. This article focuses on the National Court’s decision in the Lease Plan case to demonstrate the change in criteria for these purposes.
The Spanish tax authorities considered that insurance services, whether through external insurance policies or the direct assumption of risk by a company (self-insurance), constituted an independent and VAT-exempt activity, leading to a limitation of the deductibility of input VAT borne by the company. The tax authorities applied the pro rata rule and disallowed the deduction of input VAT on various expenses, including those related to the repair of damaged vehicles. In the Lease Plan case, the taxpayer argued that the insurance services were functionally and economically integrated into the vehicle rental agreement, forming a single, indivisible transaction subject to VAT, entitling the company to a full deduction of the input VAT.
The National Court agreed with Lease Plan, emphasizing that the rental of vehicles and the risk coverage constitute a single transaction when offered as part of the same commercial package, particularly when the customer is not given an option to contract the insurance separately. Even in cases where Lease Plan assumes the risk itself, the court held that the essential structural elements of an insurance contract, such as the existence of a policyholder, premiums and an insurer, were not met. As a result, the provision of insurance by Lease Plan acting as a self-insurer cannot be regarded as exempt under the Spanish VAT Act.
Another key issue resolved by the National Court is the deductibility of input VAT incurred on vehicle repair services. The tax authorities had disallowed the deduction on the grounds that Lease Plan was not the effective recipient of the services with respect to the insurance. However, the court held that since Lease Plan was the entity contracting, paying for and managing the repairs, it must be considered the actual recipient, thus entitling it to deduct the corresponding VAT. The court also rejected the tax authorities’ application of the pro rata rule, holding that there is no separate insurance activity within Lease Plan’s business, but rather a single, integrated economic activity, which further supports the company's right to a full deduction of input VAT on its purchases of goods and services.
Alvaro Gomez-Elvira
Maria Gonzalez
BDO in Spain
The Spanish tax authorities considered that insurance services, whether through external insurance policies or the direct assumption of risk by a company (self-insurance), constituted an independent and VAT-exempt activity, leading to a limitation of the deductibility of input VAT borne by the company. The tax authorities applied the pro rata rule and disallowed the deduction of input VAT on various expenses, including those related to the repair of damaged vehicles. In the Lease Plan case, the taxpayer argued that the insurance services were functionally and economically integrated into the vehicle rental agreement, forming a single, indivisible transaction subject to VAT, entitling the company to a full deduction of the input VAT.
The National Court agreed with Lease Plan, emphasizing that the rental of vehicles and the risk coverage constitute a single transaction when offered as part of the same commercial package, particularly when the customer is not given an option to contract the insurance separately. Even in cases where Lease Plan assumes the risk itself, the court held that the essential structural elements of an insurance contract, such as the existence of a policyholder, premiums and an insurer, were not met. As a result, the provision of insurance by Lease Plan acting as a self-insurer cannot be regarded as exempt under the Spanish VAT Act.
Another key issue resolved by the National Court is the deductibility of input VAT incurred on vehicle repair services. The tax authorities had disallowed the deduction on the grounds that Lease Plan was not the effective recipient of the services with respect to the insurance. However, the court held that since Lease Plan was the entity contracting, paying for and managing the repairs, it must be considered the actual recipient, thus entitling it to deduct the corresponding VAT. The court also rejected the tax authorities’ application of the pro rata rule, holding that there is no separate insurance activity within Lease Plan’s business, but rather a single, integrated economic activity, which further supports the company's right to a full deduction of input VAT on its purchases of goods and services.
Alvaro Gomez-Elvira
Maria Gonzalez
BDO in Spain