Developers must apply 21% VAT on works that do not qualify as rehabilitation

Determining the applicable tax rate for construction and renovation works frequently raises doubts in the real estate sector. The Dirección General de Tributos (DGT) has specified the limits that separate the application of the reduced 10% rate from the obligation to apply the general 21% rate in development operations.

What the DGT has resolved

The advisory body establishes that construction or rehabilitation works of buildings intended primarily for housing may be taxed at 10% as long as they are formalized directly between the developer and the contractor and strictly comply with the nature of rehabilitation. For a work to be considered rehabilitation, it must meet two concurrent conditions:

• Technical nature: The main object must be reconstruction, which implies that more than 50% of the cost of the work must be allocated to structural elements, facades, or roofs.
• Economic threshold: The cost of the work must exceed 25% of the value of the property, excluding the value of the land.

If the work does not meet these reconstruction or minimum cost requirements, the actions for a developer will be taxed at 21%, as they are not considered renovation and repair operations intended for individuals or communities of owners.

What this means for you

For development companies, this criterion limits the use of the reduced rate. It is not enough to carry out renovations in buildings intended for housing; it is necessary for the intervention to be structurally significant and economically relevant in relation to the value of the property. Suitability for residential use will be determined by the objective design and construction characteristics, without the existence of a certificate of habitability being mandatory for this analysis.

What should be done

It is necessary to perform a detailed breakdown of construction costs before invoicing to identify which part corresponds to structural elements, facades, or roofs. The correct classification of the work will determine the tax burden of the operation and the deductibility of the VAT incurred. It is recommended to assess each project individually to ensure that the technical nature of the renovation complies with current regulations.