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In brief

Recently, there has been development in Spain in relation to value-added tax (VAT) refunds post-Brexit, and the application of a European Court of Justice case to recent tax court rulings around indemnity payments.

The General Directorate of Taxes and the tax court issue recent tax rulings/judgments applying European Court of Justice (ECJ) case MEO to indemnity payments

The old criteria applied by the General Directorate of Taxes (GDT) and the tax court were based on the ECJ case Société thermale (C-277/05) and, in general terms, it stated that payments received as an indemnity were not subject to VAT because, behind the payments, there was no supply of services/goods.

However, these criteria recently changed in tax rulings published in June 2020. The GDT and the tax court applied ECJ cases MEO (C-295/17) and Vodafone Portugal (C-43/19) and concluded that those payments were subject to VAT at the general rate (21%).

In summary, the criteria states that to consider whether we are facing an indemnity payment, it must be determined whether there is a consumption behind the operations carried out. In short, to determine the existence of compensation that does not give rise to VAT, it is necessary to examine each specific case to see if the amount paid is intended to compensate the person who receives it for the loss of property or rights or, on the contrary, to examine if the aim is to pay back operations carried out that fall within the objective scope of VAT, determining, therefore, an act of consumption and the payment of the amount as compensation for a concrete service.

In the first case, the tax court analyzed a case concerning compensation for the termination of the construction and operation contract of a desalination plant that never came into operation. Considering that the amount of the compensation refers exclusively to the built installation, the operation is classified as subject to VAT, regardless of whether the payments made are compensatory in nature.

In the second case, the GDT analyzed a similar case to MEO, concluding that the amounts received by a provider in case of the early termination, for reasons attributable to the client, of a contract for the provision of services that provides for the observance of a period of permanence as consideration of the concession to that client of advantageous commercial conditions constitute compensation of a provision of services subject to VAT.

In any case, we are of the opinion that we still have grounds to support the fact that the indemnity payments should not be subject to VAT. However, depending on the circumstances of the case, each case should be analyzed independently to conclude so.

Spanish VAT refund after Brexit

One of the most relevant aspects concerning VAT after Brexit is the VAT refund of UK entities in European Union (EU) member states.

Spain recently published the decision to apply reciprocity criteria to proceed with the VAT refund to non-established entities in the EU but established in the UK. Therefore, the reciprocity criteria for the VAT refund have been met and Spain will proceed with the VAT refund to UK entities in general terms.

However, as there are some technical mistakes in the agreement signed by the UK and Spain regarding the application of the different VAT rules, the Spanish tax authorities are planning to issue a new resolution clarifying the aspects that were not clear.

We remain at your disposal for any consultation or clarification regarding this alert and we will keep you informed of any future changes regarding these issues as they become available.


María Antonia Azpeitia heads the Firm’s Tax Litigation and VAT practice groups in Madrid. She is ranked as a leading practitioner in her field by Chambers Europe, and is highly regarded for her work on VAT matters. She is a regular lecturer in tax seminars and conferences, and contributor to economic newspapers and other specialized publications.


Antonio Albarran is a Counsel in baker McKenzie's Madrid office.


María Delso is an Associate in Baker McKenzie Madrid office.


Jorge Gómez Alguacil joined Baker McKenzie Madrid in 2015 from a Big Four firm where he worked at the VAT and Customs department since 2010. He is a tax lawyer mainly focused on VAT matters, regularly handling complex tax issues, as well as controversies and litigation.