Buying a commercial property: determining the taxes payable.

We want to buy a restaurant in Alicante from its current owners, and have received contradictory information about the taxes to be paid for the purchase. Could you please confirm what taxes we should pay and how we should do it?

Dear reader, thank you for your enquiry.

When buying commercial premises in Spain with a view to developing a professional activity, i.e. restaurant, hotel, professional office, etc., one of the most important elements to be considered are the taxes payable: VAT or Transfer Tax. In this answer we are not considering other possible taxes to be paid, i.e.: Stamp Duty, etc.

Thus the transmission and acquisition of commercial premises may be subject to Transfer Tax TPO (Transmisiones Patrimoniales Onerosas) of 7% in the Valencia Community; or to the VAT normally at 18%. Although we may think that the 7% TPO is the best option, normally it is not, as VAT could be recovered, so it is not a real cost or expense.

Thus, in most cases it will be more advantageous to buy a property for the development of our activity subject to VAT tax, than to TPO.

If you bought the restaurant directly from the developer (first transmission), this purchase would be subject to VAT.

In your case, we understand that it is a resale (second hand purchase) from the current owner. According to VAT Law (Law 37/1992), these second and subsequent transfers of a property are exempt from the VAT and should be Tax for TPO (ITP-AJD). But the law foresees the possibility that the taxpayer waives the VAT exemption and opts to pay VAT instead of TPO. For this resignation to take effect and be valid, and therefore VAT payable, a number of requirements and formalities must to be met, which basically are:

1.-The buyer and vendor must be VAT payers, acting in the exercise of their activities. In your case, you must be a businessman buying the property (restaurant) for your business. You could not hold the operation to VAT if you were buying a house to live in it, since in that case it would not be as a part of your business activity.
2.-Also you as the buyer should be entitled to the full deduction of the VAT. This does not occur when for example a person has a VAT exempt activity, in this case would not be entitled to deduct the VAT.
3.-The renunciation to the VAT exemption and therefore the subjection to it, must be communicated prior to or simultaneous to the handing over of the property.

We recommend that this waiver and compliance with the above requirements are expressly stated in the Purchase Title Deed itself to avoid problems and comply with the formalities required.

Also be aware that Landlords who let out their properties in a habitual and professional way, may be considered VAT payers, and therefore could take advantage of the possibility to pay VAT rather than TPO in a resale of a property.

For all the above, before buying a property for your business (commercial property) or a property only to the purpose to be let out in a professional way, you should consult your lawyer about the most convenient way to do it, as subject the purchase to a one tax or another, can potentially save you many thousands of euros.

In the case you mentioned, you meet or can meet the requirements specified by the law, we recommend you opt to subject the purchase to VAT, but do not forget to meet the legal requirements to avoid problems with the settlement Tax Offices of the Valencia Community (Consellería) or the National Tax Authority (Agencia Tributaria), if you have any doubt, please do not hesitate to contact us.

The information provided on this article is not intended to be legal advice, but merely conveys general information related to legal issues.

White & Baos
Carlos Baos (Lawyer 5756)
Tel: 966 426 185

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