Covid-19 – Rent modification and VAT

Due to the current crisis, many landlords of commercial and industrial premises have been forced to renegotiate the contractual terms with the tenant, resulting in a rent reduction or a remission.

At this point, VAT comes into play and you are probably asking yourself, how much VAT must I declare for the rental if the rent has been reduced or waived?

This is exactly what considers the Binding Ruling V1467-20, de 19 de mayo de 2020, issued by the Tax Office, who answered as follows.

According to the VAT Act, the taxable base is made up of the total remuneration, excluding discounts and bonuses. Regarding accrual, in leases, and other successive treatment operations, the tax will accrue at the time the price is due.

If the reduction or waive of the rent is agreed before or at the same time as the accrual, the solution is simple: the tax base is the new reduced rent (Article 78.Tres.2 VAT Act).

If the rent reduction or waive is agreed after the VAT accrual, the baseline is the previous rent. However, you have to reduce it to the new rent according to what is stipulated in article 89 VAT Act..

To sum up, regardless of when you agree with the rent modification, you will not have to pay VAT on the part of the rent that has been reduced or waived, but only on the final agreed rent. But be careful, this is only possible when the modification is formal and express. In other words, it always needs to be done in writing as an annex to the contract, or similarly.

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