Sale of rural estates without urbanization works will be exempt from VAT

The fiscal nature of the transfer of rural land depends directly on the state of physical or economic transformation in which the property is found. The Dirección General de Tributos (DGT) has specified the limits that determine whether an operation of this type falls outside the scope of VAT application.

What the DGT has resolved

In accordance with current regulations, the supply of rural land is exempt from VAT as long as it does not possess the status of buildable land nor is it in the process of urbanization. The administration's criteria establish that land is considered to be undergoing urbanization under two assumptions:

• Physical transformation: When material works intended for the transformation of the land have begun.
• Economic transformation: When the transferor has already incurred costs related to the urbanization of the land.

If the land already has the status of a plot (solar) or is fully buildable, the exemption is not applicable and the operation will be subject to the tax. However, the regulations allow the acquirer, if they are a taxable person with the right to deduction, to opt to waive the exemption so that the operation is subject to VAT.

What it means for you

If you are an individual or a company carrying out the sale of land, you must verify the legal and material status of the estate before the transaction. The existence of urbanization costs already incurred, even without machinery being present on the land, can convert an exempt operation into an operation subject to VAT.

For companies acting as developers, this criterion is decisive for the management of their costs and the correct application of the tax in the transfer of their assets.

What should be done

It is necessary to perform a technical and accounting check of the state of the land. You must determine if there are works in progress or if urbanization expenses have been incurred that alter the rural nature of the soil. In the event that the acquirer is a professional with the right to deduction, the convenience of waiving the exemption should be assessed to avoid deductibility issues in the operation.