Compensation for damages for de facto occupation and VAT
The Directorate-General for Duties (Dirección General de Tributos) has issued a binding ruling on Consultation V0276-19 that analyses the processing of value-added tax(“VAT”) for amounts paid by the Government to a company as a result of the de facto occupation by a government entity of a property owned by the company, to carry out work on the public highway. The principal new development contained in the Consultation is that it establishes a novel administrative criterion on the nature for VAT purposes of amounts paid for the temporary occupation of land, declaring that contrary to other previous consultations (in particular CV 1041-13) such temporary occupation should not form part of the taxable base for the tax.
On the matter of the amount received by the company in compensation for the harm caused by the unlawful occupation of the land, the Consultation asserts that it would not be considered consideration for any transaction subject to VAT, as the amount does not correspond to consideration for an occupation that was not permitted – there not, therefore, being any legal link between the parties – but to compensation for the loss and harm caused to the company by such occupation.
The Directorate-General for Duties reached this conclusions after analysis of section 78.3.1 of the Spanish VAT Act (Ley del IV) – according to which the taxable base is not to include “amounts received as compensation other than those indicated in the previous section, which because of their nature and purpose, do not constitute consideration or compensation for the delivery of goods or the providing of services subject to the tax” – in accordance with settled case law of the Court of Justice of the European Union, and in particular considering the so-called “direct relationship criterion” established by this Court, according to which: “a supply of services is effected ‘for consideration’, within the meaning of Article 2(1) of the Sixth Directive, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.”
The Consultation adopts the same criterion in relation to the increased amount of the fair price of the assets recognised by the court to achieve full compensation for the harm caused to the company.
On the matter of the amount received by the company to cover the fair price of the occupied assets, the Consultation ruling reiterate the criteria of previous consultations, declaring that it is compensation for a forced delivery of a property, and is, therefore, subject to VAT, but exempt because of the application of section 20.1.20 of the Spanish VAT Act, as the unlawful occupation originated from the performance of work on the public highway.
Lastly, in the case of the interest because of procedural delay that the company is to receive, the Consultation declares that such compensation should not be included in the taxable base for VAT for any transaction because of its compensatory nature, not being consideration for any transaction subject to VAT, again following application of section 78.3.1 of the Spanish VAT Act, in harmony with section 576 of the Spanish Civil Procedure Act (Ley de Enjuiciamento Civil) on the matter of interest on procedural delay.