The Author of the Article
VAT is recoverable on your expenses
If your company has incurred VAT on expenses paid in Spain it is, in principle, entitled to claim the full VAT back from the Spanish VAT authorities. This recovery of VAT (known as the ‘”right to deduct” or the “right to refund”, depending on the situation) is an integral part of the VAT system.
Let's take an example
A Spanish supplier sells a machine (which remains in Spain) to a German company. The Spanish supplier should issue an invoice with Spanish VAT, which the German company will be able to claim back from Spanish VAT authorities: either via its Spanish VAT return (“right to deduct”) or via a special electronic procedure (“right to refund”) if the German company is not VAT registered in Spain.
What are the rules in Spain?
Your company can normally reclaim 100% of the Spanish VAT incurred on its expenses.
However, Spain has used the option provided by the VAT Directive to exclude or reduce VAT recovery on certain goods and services which it already exercised as its date of joining the EU ("standstill clause" - art. 176 VD).
For a number of categories of expenses, there is therefore no right or partial right of deduction. Such expenses notably include:
- Entertainment and recreational expenses: 0%
- Food and drinks: 0%
- Gifts to employees, clients or third parties: 0%
- Vehicles costs (passengers cars): deduction based on business use. 50% VAT recoverable is commonly accepted by Spanish VAT authorities. Rental of cars and fuel can be fully recoverable if the vehicle is exclusively used for business activities
- Travel expenses, accommodation and restaurant services: 0% recoverable unless the expenses are deductible for direct income tax purposes.
How to request a VAT refund?
If your company files VAT returns is Spain, you can only claim VAT refund once a year in the last VAT return of the civil year (Q4 or Q12 provided you are not in the REDEME). This claim needs to be reported in the VAT return (modelo 303). The time for the effective refund is of approximatively 6 months if no VAT audit is initiated.
The VAT expert's eye
VAT is a tax which, in principle, is neutral for your company. If your company buys goods or services with VAT from abroad, it can claim this VAT back from the local treasury, which may offer a significant opportunity to reduce tax costs.
However, to achieve this result, your company must respect the rules of the VAT game, including 5 major principles:
- Improve your internal VAT recovery process (by tracking all expenses with foreign VAT)
- Ensure that local VAT has been correctly invoiced by the supplier
- Check whether VAT is fully or partially recoverable in the country
- Receive an invoice from your supplier with all mandatory details (name, address and relevant VAT number of the parties involved, detailed description of goods or services, etc.)
- Use the correct refund procedure
If your company fails to comply with any one of these 5 key principles, it may never recover the VAT paid on its expenditure.