International sections may apply VAT exemption on social assistance services

Determining the tax burden on operations carried out by social entities with an international presence presents relevant technical nuances. Recently, the Directorate General of Taxes (DGT) has specified the treatment of Value Added Tax (IVA) applicable to the services and goods these organizations receive from their international sections.

What the DGT has resolved

The administration has established that services received by an entity holding the status of a taxable person are subject to IVA when performed in Spanish territory. However, the exemption provided for social assistance reasons will be applicable provided that two concurrent requirements are met:

• That the services are indispensable for the development of the social assistance activity.
• That the international sections hold the status of private establishments of a social nature.

In this sense, the DGT warns that the exemption cannot be applied to the mere re-invoicing of administrative expenses that are not directly linked to social assistance programs. On the other hand, regarding the delivery of acquired goods whose availability occurs outside the territory of application of the tax, these are not considered subject to IVA.

What it means for you

If your organization operates through international sections and carries out social assistance activities, the correct classification of the services received is fundamental for cost management. The exemption is not automatic for any concept invoiced by the international section; there must be a direct and necessary link to the social work to avoid contingencies with the Administration.

It is necessary to distinguish between the operating costs of assistance programs and administrative management expenses. While the former could benefit from the exemption, the latter must bear the tax in the ordinary manner.

What should be done

Entities must perform a detailed analysis of the nature of the services contracted with their international sections. It is necessary to document the indispensability of each service for the social assistance programs in order to justify the application of the exemption in the event of an inspection. Likewise, the status of private establishment of a social nature of the international sections must be verified to ensure compliance with current regulations.