Taxes When Buying a Commercial Property: Transfer Tax, VAT, Stamp Duty, Municipal Capital Gains Tax and Property Tax

Buying commercial premises for your business doesn’t end with the agreed price. Several property-related taxes come into play, and who pays them, and how they are accounted for, depends on who is selling and how the transaction is structured. It pays to be clear on this before signing at the notary, because it changes the real cost of the purchase.

ITP or VAT + AJD: it depends on the seller

The first question is always the same: is the seller a private individual, or a business acting in its capacity as a trader?

If a private individual sells (or a trader who does not charge VAT on that transaction), the purchase is subject to Transfer Tax (Impuesto sobre Transmisiones Patrimoniales Onerosas, or ITP). The buyer pays it, it is settled with the autonomous community where the property is located, and each community sets its own rate, so it varies from one region to another. Check the rate currently in force in your community before you budget.

If a trader or a company sells and the transaction is subject to VAT, the purchase carries VAT (at the standard rate for commercial premises and offices) and, in addition, Stamp Duty (Impuesto sobre Actos Jurídicos Documentados, or AJD) on the deed. ITP and VAT are mutually exclusive in the same transaction; AJD, however, is added on top of VAT. The buyer pays it too, and its rate depends on the autonomous community.

A useful clarification: second and subsequent transfers of buildings are usually exempt from VAT, even if the seller is a trader, in which case ITP applies. It is also possible to waive that exemption under certain conditions, something that should be reviewed with your adviser and reflected in the deed.

The practical difference is significant: input VAT may be deductible if your activity entitles you to deduct it, whereas ITP is always a cost. That is why, for a self-employed professional or a small business that charges VAT, buying from a trader with VAT is often easier on cash flow in the long run, even though you have to advance the tax.

Municipal capital gains tax and IBI: who pays each?

The municipal capital gains tax (Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana, known as “plusvalía municipal”) taxes the increase in the value of the land during the period the seller owned it. By law, the taxpayer in a sale is the seller. It is another matter if the contract provides that the buyer will bear it: that is legal between the parties, but it should be put in writing and reflected in the price, because that amount forms part of what the transaction really costs you. It is calculated under national rules and each town council’s bylaw, and no tax is due if the seller has made no actual gain.

IBI (the annual local property tax) accrues once a year and, as far as the town council is concerned, whoever owns the property on the accrual date is liable. In practice, it is common to apportion the bill between seller and buyer according to the days each one owned the property, and to agree this in the deed. In addition, the property may carry outstanding IBI debts: always ask for the paid-up receipts and an up-to-date land registry extract (nota simple), because IBI debts can attach to the property and to its new owner.

What is capitalised in the accounts, and common mistakes

Under the Spanish General Accounting Plan, the property is measured at its purchase price plus the additional costs necessary to bring it into working condition. This normally includes:

• ITP or AJD, and VAT where it is not deductible.
• Notary, land registry and administrative agent fees linked to the purchase.
• Municipal capital gains tax, if you take it on by agreement.

An example with round numbers: you buy a commercial property for €200,000 from a private individual, and the applicable ITP rate happens to be 6%. You would pay €12,000 in ITP, which you add to the cost of the property together with notary and registry fees. If, on the other hand, you buy from a company with VAT at 21%, the VAT would be €42,000, which, if your activity allows it, you deduct through your Form 303 VAT return rather than capitalising it; the AJD would form part of the cost.

Remember, too, to separate the value of the land from that of the building: land is not depreciated. And the IBI for each later year is not capitalised: it is an expense for the period.

Common mistakes: assuming VAT is always payable, failing to agree who bears the municipal capital gains tax, capitalising deductible VAT as part of the property’s value, or failing to apportion the IBI. All of them can be avoided by reviewing the transaction before signing.

At Zythos Business we support self-employed professionals and small businesses before and after the purchase: we analyse whether VAT or ITP is the better route, review the deed, calculate the capitalisable cost and make sure the transaction is properly recorded and depreciated from day one, so that the property adds value rather than surprises.