Delivery of first occupancy housing, first occupancy licence, certificate of occupancy and applicable VAT rate

As all promoters know, the period of time between the completion of a new building, which is accredited with the certificate of the Technical Management of the building work and the granting of the first occupancy licence by the local councils, can be two or three months, which is optimistic in some cases, as an ocular inspection by the municipal technician is required. Furthermore, once the licence has been granted, there is still the administrative procedure of going to the Island Council, Consell Insular to obtain the certificate of occupancy, which in Mallorca takes approximately one month.

Faced with these facts, the situation we find ourselves in is that the seller wants to sell after completion and the buyer wants to buy and move in. However, as we will see below, VAT tax regulations de facto prevent both the seller's and the buyer's wishes from being fulfilled.

Indeed, for the purposes of the VAT Law, the first supply of a dwelling is considered to be that made by the developer for the purpose of a building whose construction or renovation has been completed.

With regard to the VAT rate applicable to this first supply of housing, Article 91.1.1.7 of the VAT Law must be taken into account, which establishes the application of a reduced rate of 10 per cent to the following supplies: 7º Buildings or parts thereof suitable for use as housing, including parking spaces, with a maximum of two units, and annexes located therein that are transferred jointly.

In this regard, the Directorate General for Taxation has ruled in several binding consultations (V2970-20, V3248-18, V0284-10) on the criteria followed by the Administration to consider a building suitable for use as a dwelling: a property is considered part of a building suitable for use as a dwelling when it has the corresponding certificate of occupancy or first occupation licence at the time of delivery and, objectively considered, it is suitable for use as a dwelling. The determining factor for the application of the reduced rate of 10 per cent to the supply under consultation is the suitability of the flat for use as a dwelling. This suitability is granted by the corresponding certificate of occupancy or licence of first occupation, and it is therefore irrelevant what purpose (office or office) the property is to be used for.

Therefore, in the event of not having the corresponding certificate of occupancy or first occupation licence at the time of transfer, the transfer would not be subject to the reduced rate of 10 per cent and would be taxed at the general rate of 21 per cent.

However, if the construction of the property is completed, as evidenced by the end of the construction work signed by the project management, but the first occupancy licence and/or the certificate of occupancy has not yet been obtained by the competent authorities, then the construction of the building will be completed.

In the case of the administrative procedure mentioned above, could the 10 per cent rate be applied if it is demonstrated by means of a certificate of completion from the project management and/or an architect's certificate certifying that the dwelling meets the conditions required by Autonomous Decree 145/97 of 21 November, which regulates the conditions of habitability of a dwelling, that the dwelling is finished?

On this issue, the Central Economic Administrative Court (TEAC) has ruled favourably in its resolution of 21 May 2021, in which it establishes that "nevertheless, the application of the reduced rate is also allowed in a case in which the certificate of occupancy was obtained after the date of delivery, but the claimant duly proves that the construction of the property was completed on the date of delivery, that there was no modification of the property between that date and the date of obtaining the certificate, the delay being due solely to administrative reasons. Therefore, the reduced tax rate is applicable when it is proven that the municipal certificate of completion and the certificate of occupancy are granted in respect of a property that is in the same state and condition as at the time of delivery".

In this regard, the TEAC confirms that the certificate of occupancy is not the only objective criterion for assessing whether a property can be classified as a dwelling. In the event that there is no modification to the property between the final building work of the building management and the certificate of occupancy, the reduced rate of 10 per cent may be applied.

Despite the above, it should be noted that the TEAC ruling does not expressly state the change of criterion, so that as of today this previous ruling is not binding for the Tax Administration in accordance with Article 242.4 of the General Tax Law. Therefore, until a new tax consultation or a resolution for unification of criteria is issued in accordance with the criteria of the TEAC of 21 May 2021, there will not be full legal certainty for the taxpayer and therefore it will be necessary to wait for the two administrations (Town Hall and Island Council) to grant the licence of first occupation and certificate of occupancy respectively.

Santiago Blas Janssens
Economist-Tax Advisor

Javier Blas Guasp
Managing Partner

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