Expropriation of rural land prior to urbanization will be exempt from VAT

The nature of a land transfer depends on the physical state of the soil at the time of the transaction. Recently, the Dirección General de Tributos (DGT) has clarified the tax treatment applicable to the expropriation of rural land occurring before the material actions of physical transformation of the land begin.

What the DGT has resolved

The tax administration has ruled that if the expropriation occurs before the start of urbanization works, the transfer of said land is subject to but exempt from Value Added Tax (IVA). This treatment is due to the rural nature of the soil at that specific moment.

A key aspect of the ruling is that the subsequent use the acquirer assigns to the plots does not alter this initial treatment. For example, if the buyer acquires the expropriated land with the intention of developing housing intended for rent, the land acquisition operation remains a VAT-exempt transfer due to its status as rural land.

What this means for you

This criterion has direct implications for managing the tax burden and the ability to recover taxes for developers:

• For owners: Owners of rural land subject to expropriation before urbanization works begin will not be taxed under Value Added Tax (IVA); instead, the operation will be governed by the Transfer Tax (Impuesto sobre Transmisiones Patrimoniales).
• For developers: If the developer acquires the land under this exemption regime and subsequently uses the constructed homes for leasing, they will face a limitation in tax recovery. Since leasing is an exempt activity, the developer will not be entitled to deduct the IVA incurred during the urbanization and development phases.

What should be done

It is essential to analyze the timeline of the physical transformation actions of the soil against the moment of expropriation. The distinction between rural and urban land for VAT purposes depends strictly on the existence of material urbanization actions. It is recommended to assess the structure of the development activity and the final business model (sale or rent) to understand the impact on the deductibility of the IVA incurred during the project.