Associations may carry out activities subject to VAT without losing their exemptions

Non-profit entities operating under exemption regimes for Value Added Tax (VAT) frequently face the dilemma of whether introducing new economic activities could compromise their tax status. A recent binding ruling from the Dirección General de Tributos (DGT) provides clarity on the coexistence of exempt and taxable activities.

What the DGT has ruled

The advisory body has determined that carrying out operations subject to VAT is fully compatible with maintaining the exemptions provided for in Law 37/1992. Specifically, the DGT analyzes two scenarios:

• Exemption for membership fees (Art. 20.One.12.º): This exemption applies exclusively to services provided to members through the payment of statutory fees. However, if the entity provides services to third parties or establishes prices independent of the membership fee, such operations will be subject to VAT.
• Exemption for social assistance (Art. 20.One.8.º): To maintain this benefit, the activity must be for social assistance and the entity must possess a defined social character.

The resolution confirms that the existence of taxable operations does not entail the automatic loss of exemptions for the association's other activities.

What this means for you

If you manage an association or a non-profit entity, this criterion allows you to diversify your income sources without the fear of losing the tax benefits of your main activities. However, the coexistence of both regimes imposes a technical obligation: the entity must determine which part of the input VAT it can deduct.

To this end, regulations require the application of the split-sector regime if possible. In the event that the taxable activity cannot be accounted for separately from the exempt activity, the pro rata rule must be applied to calculate the right to deduction.

What should be done

When implementing new economic activities, it is necessary to conduct an analysis of the cost structure and the nature of the services provided. It must be evaluated whether the new activity is aimed at members or third parties, and whether it meets the social assistance requirements to avoid errors in the application of VAT regulations. Each situation requires a technical assessment to determine the most appropriate deduction model according to Law 37/1992.