Construction companies must apply the reverse charge mechanism in rehabilitation works

The application of the reverse charge mechanism in the construction sector generates frequent doubts regarding the scope of operations subject to this mechanism. The Dirección General de Tributos (DGT) has specified the necessary requirements for this collection rule to be correctly applied in the execution of works.

What the DGT has resolved

The tax authority establishes that the reverse charge mechanism, regulated in Article 84.One.2º.f) of Law 37/1992, is applicable provided that three concurrent conditions are met:

• Nature of the recipient: The client must be a businessperson or professional.
• Nature of the operation: It must involve the execution of works, with or without materials, intended for the urbanization, construction, or rehabilitation of buildings.
• Contractual relationship: There must be a direct contract with the developer or a subcontract derived from a main contract of the same nature.

The criteria emphasize that the work must be integrated into the construction or rehabilitation process for the reverse charge mechanism to be appropriate.

What this means for you

If your professional activity consists of providing construction, supply, or installation services, you must precisely identify the destination of the work. The relevance of this criterion falls directly on companies performing installations in new construction projects or in property rehabilitation processes.

If the operation is not integrated into a construction or rehabilitation process, or if the recipient does not meet the condition of being a businessperson or professional, the invoice must be issued with Value Added Tax (IVA) applied ordinarily by the service provider, rather than through the reverse charge mechanism.

What should be done

It is necessary to analyze the structure of the contracts and the nature of the services provided to determine the IVA treatment. The correct classification of the operation avoids errors in invoicing and tax settlement. It is recommended to evaluate each contract individually to confirm whether the work is integrated into a construction or rehabilitation process and whether the client meets the established legal requirements.