Reverse charge mechanism applies to the permanent installation of electrical substations

The nature of electrical installations determines the treatment of Value Added Tax (IVA) during their assembly phases. The Directorate General of Taxes (DGT) has clarified the application of the reverse charge mechanism in the context of the construction and renovation of electrical substations.

What the DGT has ruled

The ruling analyzes whether the reverse charge mechanism provided for in Article 84.One, 2, letter f) of Law 37/1992 is applicable to the installation of electrical substations. The administrative criteria distinguish between two scenarios:

• Provisional installations: As they are temporary and dismantlable structures, they are not considered building work; therefore, the reverse charge mechanism does not apply.
• Permanent installations: The reverse charge mechanism may apply if they meet one of these requirements: they are capable of autonomous use (classified as building work) or they are carried out as a renovation of an existing substation, in accordance with Article 20.One.22 of Law 37/1992.

In cases where the reverse charge applies, the electricity company will be the one assuming the status of the taxable person, as it is the business recipient of the operation.

What this means for you

For companies in the energy sector and their suppliers, the distinction between a temporary installation and a permanent one is decisive for VAT management. If the work is classified as a provisional installation, the supplier will invoice the tax in the ordinary manner. However, if the work constitutes building or renovation, the responsibility for declaring the tax is transferred to the recipient (the electricity company) through the reverse charge mechanism.

It is relevant to note that, even if a company bears the cost of the work, if the operation is subject to the reverse charge mechanism, said company will not be the taxable person for the operation, regardless of who makes the payment of the invoice.

What you should do

It is necessary to verify the technical and legal nature of each electrical installation project before proceeding with invoicing. It must be determined whether the infrastructure is considered building or renovation work to correctly apply the corresponding VAT regime and avoid errors in the tax declaration.