Developers may apply 10% VAT to the sale of plots and construction

The application of the reduced tax rate in real estate operations that combine the sale of land and building has generated various technical interpretations. Recently, the Dirección General de Tributos (DGT) has specified the necessary conditions for this combination to be treated as a single economic provision.

What the DGT has resolved

The tax authority establishes that if the delivery of the land and the execution of the work constitute an inseparable economic provision, it must be considered a single operation. For this criterion to be applicable, two fundamental requirements must be met:

• Lack of isolated utility: The delivery of the plot must not have a practical utility for the client independently of the construction.
• Control of the land: The construction company must retain control over the land until the moment of the final delivery of the home.

If these precepts are met, the reduced rate of 10% will be applied globally, affecting both the sale of the land and the construction of the home.

What this means for you

For developers and construction companies, this criterion allows for a more coherent cost and price structure when the business model is based on the delivery of turnkey homes. Compliance with these requirements avoids the fragmentation of the operation, where the land could be subject to the general rate of 21% and the construction to the reduced rate of 10%.

For the final purchaser, this scenario represents a direct economic benefit, as the impact of VAT on the total acquisition price of the home will be lower when the 10% rate is applied to the entire operation.

What should be done

It is necessary to analyze the nature of the sale and construction contracts to ensure that the legal and operational structure reflects the inseparability of the provision. Documentation must prove that the land has no independent use value for the buyer before the completion of the work. It is recommended to assess each contract individually to verify whether the control of the land and the utility of the plot meet the standards required by current regulations.