Tax advisor: Is it possible to deduct VAT on services in a property partially used for business?

The deduction of VAT on water, gas, electricity and telephone services in properties used for both business and residential purposes was a controversial issue in tax matters. The Treasury and the General Directorate of Taxes had maintained a restrictive position in denying this deduction. However, a recent Resolution of the Central Economic-Administrative Court (TEAC) issued in July 2023 has clarified the situation and changed the perspective.

The Resolution of the TEAC of July 19^th, 2023 focuses in particular on the possibility of deducting VAT paid on services such as water, gas, telephone and electricity in a property that is used in part for commercial activities. In this instance, this is a property that functions as the tax address of a company and at the same time as the main residence of a partner of the company.

According to the provisions of article 95, paragraph 4 of the VAT Law and its interpretation in relation to articles 168 and 168a of Council Directive 2006/112/EC of November 28^th, 2006 (VAT Directive), the taxpayer is allowed to deduct the VAT paid on supply expenses (such as water, electricity and gas) for real estate that forms part of the business assets and is used both in business activities and for personal purposes. The deduction of these fees must be made in proportion to their use in connection with the business activities of the company.

This change in the position adopted by the TEAC implies that the tax authority should authorize the deduction of non-prescribed quotas in situations similar to the one analyzed in the resolution in question. These cases must comply with the conditions stipulated in article 168a of the Directive, which establishes that when a property is part of the business assets of a taxpayer and is used for both business activities and personal purposes.

B Law & Tax International Tax & Legal Advisors.

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