The Tax Authorities Allow That Real Estate Operation Deposits (Earnest Money) Are Not Subject To VAT If The Buyer Terminates The Agreement

17 March 2009

Binding revenue ruling from the General Tax Directorate No. V1675-08. European Court of Justice ruling dated July 18, 2007. C-277/05

The binding revenue ruling provided by the Spanish Tax Authorities is based on a property purchase agreement in which the buyer paid a deposit on the final price. At a later date, the buyer unilaterally terminated the agreement and was thus obligated to compensate the seller for said termination.

Up till now, the Tax Authorities adhered to that set forth in Article 78. Two.5 of the VAT Act (hereinafter VAT) and determined that in cases of terminations of taxable transactions the taxable base was the retained amount, that is the deposit made by the buyer. This meant that there was no rectification for termination of the agreement and the VAT paid on the deposit still applied.

However, and following the criteria of the European Court of Justice ruling dated July 18, 2007, C-277/08, the amount of the price (the deposit) retained as compensation for the damages caused by the buyer’s breach of their obligations does not constitute consideration subject to VAT, and therefore the seller should not pay tax on the retained amount and is obligated to issue an adjusted invoice for the total amounts paid by the buyer, without VAT of course.

In summary, and based on the revenue ruling, we confirm that the amounts paid as a deposit in a real estate sale are not subject to VAT if the agreement is terminated, although said amounts do compensate the seller for the termination. The seller must issue the corresponding adjusted invoice.

For further information, please contact Gustavo Yanes Hernández: gyanes@mmmm.es