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Proportional deduction of VAT

When a company makes both taxable and non-taxable transactions, is subject to the so-called proportional deduction of the VAT, whereby the company can only deduct the VAT attributable to taxable transactions.

In case of the acquisition of fixed assets, entrepreneurs must adjust the initial VAT deducted during several years following the acquisition of an asset, if the ratio of the proportional deduction varies (– as long as such change exceed 10 points-). Normally the proportional deduction varies each year, since the ratio of taxable and non-taxable transactions varies every year. Then, according to the Law, the initial deduction must be adjusted. In case of capital goods, the adjustment must be spread over five years, while in case of immovable property the adjustment period is ten years. Let us see how it works with an example:

An school has the following sales in years n and n+1:

Table explaining the right of proportional deduction of VAT

In year n the company buys a computer and pays a VAT of 1,000 Eur. Since the right of proportional deduction in year n is 60 % (the same as the ratio between taxable and non-taxable sales), the company deducts a VAT of 600 €.

Then in year n+1, the right of proportional deduction increases to 73 % (more than 10 points) and then the tax payer would be entitled to an adjustment calculated as follows: 1,000 * (73 % – 60 %): 5; thus 1,000 * 13 %: 5 = 26 €

The company shall calculate this adjustment during all the remaining adjustment period (until n+4)

In Tax Partners we provide VAT services in Spain since 1996. Do not hesitate to contact us for further information