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An even more reasonable use and enjoyment rule in Spain

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Fernando Matesanz of Spanish VAT Services reports on a welcome modification to the use and enjoyment rule previously analysed in an ITR article.

The Spanish government provided a pleasant surprise on May 24 2023 with the approval of a piece of legislation which, although initially intended to update the General Spanish Tax Law in the area of administrative cooperation, further modifies the Spanish use and enjoyment rule in VAT.

Only a few months ago, as summarised by Spanish VAT Services inanother article for ITR, the Spanish government passed the General State Budget Law for 2023. This legislation included important changes to Spanish VAT law. Perhaps the most significant of these was the modification of the so-called use and enjoyment rule.

The application of this rule has been a complex matter for Spanish VAT-able persons in recent years, as its scope of application has expanded significantly, and it has been applied in a large number of situations, making Spanish companies uncompetitive in many cases.

From January 1 2023, the scope of this rule was greatly reduced with the changes approved in the General State Budget Law. The main modification included at that time was that for most supplies of services (those listed in Article 59 of the VAT Directive), the rule only applies when the recipient is a final consumer. With regard to B2B services, the rule applies in the case of leasing of means of transport and in the case of financial and insurance activities.

A welcome change for Spanish taxable persons

With the recent changes surprisingly introduced by the Spanish government, financial and insurance services are excluded from the use and enjoyment rule, with its scope of application reduced even more. Considering how controversial and complicated the application of this rule was, and proving very detrimental for Spanish companies, it can be said that this is a welcome change.

Following this modification, the application of the use and enjoyment rule will apply to the provision of the services listed in Article 59 of the VAT Directive only where they are provided to final consumers (B2C) and to the leasing of means of transport, irrespective of the type of recipient of these services. No other services are within the scope of the rule.

This is undoubtedly a change that will be very well received by Spanish taxable persons, which in many cases were forced to charge Spanish VAT to non-European customers based on ambiguous criteria, leading to complexity in terms of the recovery of VAT charged.

It should be remembered that this rule, as it is set forth in the VAT Directive, aims to avoid cases of double taxation or non-taxation. It cannot be applied in any other situation.

A lingering challenge in providing legal certainty

Despite these modifications – which, as mentioned, are good for businesses – there are still challenges and concerns that need to be addressed to provide as much legal certainty as possible in the application of this rule.

For example, in those few cases where the rule is yet to be applied, it is still necessary to determine what is meant by ‘use and enjoy’ a service in Spain. This has proven to be a complicated task in many cases and there are no clear guidelines from the authorities in this respect.

‘Use and enjoyment’ has traditionally been understood as an exploitation of a certain service in a certain territory. In this sense, perhaps one can have an idea of what it is to exploit a service in a given territory in the case of a taxable person carrying out an economic activity. However, the complexity can be great in the case of a final consumer.

An added difficulty is that the new scope of application of this rule takes effect from 2023, which means that for years prior to this date, the previous application and interpretation of the rule, which was clearly complicated and in certain cases even clashed with EU law, continues to apply. Until these years are completely closed due to the statute of limitations, uncertainty will remain for Spanish businesses and for the recipient of the services supplied.

A positive move by the government

In any case, Spanish VAT Services considers that the changes recently introduced by the Spanish government are positive and a step in the right direction. Therefore, from this firm’s perspective, they are indeed good news.

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