Construction and urban development companies must apply the reverse charge mechanism to their works

The Dirección General de Tributos (DGT) has clarified the treatment of Value Added Tax (IVA) in works execution operations. The criteria establish the necessary conditions for the reverse charge mechanism to be activated in key sectors such as construction and urban development.

What the DGT has resolved

The binding body determines that the reverse charge mechanism applies whenever three concurrent requirements are met:

• The recipient of the operation must be a businessperson or professional.
• The activity must consist of the execution of works, whether for urban development, construction, or rehabilitation, with or without the supply of materials.
• The operation must have the nature of works execution itself.

Furthermore, the resolution confirms that this mechanism is applicable when works are carried out for a main contractor or for subcontractors deriving from a main contract for these activities. On the other hand, it is specified that the status of developer requires holding a title of ownership over the work and having the intention to sell or transfer it.

What this means for you

This criterion has a direct impact on the tax operations of construction companies, urban developers, and subcontractors. If you provide works execution services to other businesspeople or professionals, the responsibility for settling the IVA is transferred to the recipient of the operation.

For homeowners' associations, the impact is indirect but relevant. If an association acts as a developer when commissioning rehabilitation or construction works, it must observe whether the requirements for the application of this reverse charge mechanism are met.

What should be done

It is necessary to verify the status of businessperson or professional of the recipient of the work before issuing the invoice. The correct determination of whether the operation constitutes works execution or a mere provision of services is fundamental to avoid errors in the tax settlement. It is recommended to analyze the structure of contracts, especially in subcontracting cases, to ensure that the correct invoicing model is applied according to current regulations.