Developers may exclude contractor profit and overheads from the ICIO

The determination of the taxable base for the Tax on Constructions, Installations, and Works (ICIO) is a decisive factor in the tax burden of building projects. A recent ruling by the General Directorate of Taxes (DGT) has clarified which concepts must be included and which may be excluded from this calculation.

What the DGT has ruled

The inquiry addressed whether the business profit and overheads of direct contractors should form part of the tax's taxable base. The DGT's criteria establish that these concepts should not be included, as they do not constitute part of the material execution cost of the work.

The ruling specifies that this exclusion is applicable to all direct contractors hired for the execution of the work. However, for this reduction of the taxable base to be valid, strict documentation requirements must be met:

• Overheads and profit must be duly identified in the documentation.
• Such concepts must appear clearly in the invoices or in the work certificates issued by the contractors.
• The excluded items cannot be part of the material execution cost of the construction.

What it means for you

For development companies, this ruling represents an opportunity to optimize the tax burden of their projects. By not including the contractor's profit margin or their structural costs in the taxable base, the total amount payable for the ICIO is significantly reduced.

This criterion is based on the nature of the tax, which must levy the real cost of construction rather than the economic profit of the intervening agents. However, the application of this criterion is not automatic and depends entirely on the quality of the accounting and technical information presented to the Administration.

What should be done

It is necessary to ensure that the contracts and invoicing of direct contractors are designed to allow for this segregation. The key lies in cost traceability: invoices must unequivocally itemize which part corresponds to the material execution cost and which part corresponds to profit and overheads. Deficient documentation or a grouping of concepts could invalidate the exclusion during an inspection.