Recent developments in Spain shed new light on when the reduced VAT rate may apply to real estate transactions. A June 2025 decision of the Economic Administrative Central Court (TEAC) addresses the VAT treatment of finance lease agreements with a purchase option when the underlying property is subleased. In parallel, the General Directorate of Taxes (GDT) has updated its position on the VAT rate applicable to the sale of dwellings following a 2025 Supreme Court ruling. Together, these developments signal emerging trends in both administrative and judicial interpretation.
A TEAC decision released on 19 June 2025 examined the contentious issue whether the reduced 10% VAT rate under article 91.1.2.11 of the VAT law applies to finance lease agreements with a purchase option on property intended for residential use when the property is subleased.
The case before the TEAC involved a company that has held a lease-purchase agreement since 2006 for a mixed-use building (residential units and commercial premises) and that applied the 21% standard VAT rate on lease instalments made between 2017 and 2021. The company later requested a refund of EUR 102,657.94, arguing that the reduced 10% VAT rate should apply because the building was intended for residential use. The tax authorities rejected the claim on the grounds that the property was not used “exclusively for residential purposes,” as the units were subleased in the course of an economic activity.
The company argued that the VAT neutrality principle and prior GDT criteria supported the application of the reduced rate based on the residential use by the subtenants. The authorities, however, relied on a binding ruling that specifically excludes subleasing arrangements from the application of the 10% rate.
The TEAC sided with the tax authorities, emphasising that:
The TEAC clarified that finance leases with an option to purchase on residential property can only benefit from the reduced rate when the use of the property is exclusively residential. Even if the property is used for residential purposes, the reduced rate is not available where the lessee is acting as an economic intermediary because it is subleasing the property. Although not yet binding precedent, the TEAC decision reflects the current trend of administrative court reasoning on this issue.
In September 2025, the GDT revised its position regarding the VAT rate applicable to the sale of dwellings in light of a Supreme Court decision issued earlier that year (for prior coverage, see the article in the February 2025 issue of Indirect Tax News).
Under the Spanish VAT Act, the reduced 10% VAT rate may apply to the transfer of a dwelling if the following requirements are met:
Early in 2025, the Spanish Supreme Court, referring to previous related resolutions and decisions of the Court of Justice of the European Union, held that suitability must be assessed objectively, not based on administrative formalities. Requiring a certificate of habitation could lead to inconsistent treatment across regions due to varying administrative timelines.
In response to the Supreme Court decision, the DGT has revised its position and announced that a habitation certificate is no longer mandatory to apply the reduced VAT rate. Nevertheless, both the Supreme Court and the DGT have confirmed that the seller is still required to demonstrate the suitability of the construction as a dwelling through any legally valid means. As a result, even though the formal requirements have been eased, from a practical perspective, being in possession of a certificate of habitation will effectively function as a “safe harbour” to allow the application of the reduced VAT rate.
Alvaro Gomez-Elvira
Andres Diaz
Verònica Targa
BDO in Spain
Finance Lease with Purchase Option: Impact of Subleasing
A TEAC decision released on 19 June 2025 examined the contentious issue whether the reduced 10% VAT rate under article 91.1.2.11 of the VAT law applies to finance lease agreements with a purchase option on property intended for residential use when the property is subleased.The case before the TEAC involved a company that has held a lease-purchase agreement since 2006 for a mixed-use building (residential units and commercial premises) and that applied the 21% standard VAT rate on lease instalments made between 2017 and 2021. The company later requested a refund of EUR 102,657.94, arguing that the reduced 10% VAT rate should apply because the building was intended for residential use. The tax authorities rejected the claim on the grounds that the property was not used “exclusively for residential purposes,” as the units were subleased in the course of an economic activity.
The company argued that the VAT neutrality principle and prior GDT criteria supported the application of the reduced rate based on the residential use by the subtenants. The authorities, however, relied on a binding ruling that specifically excludes subleasing arrangements from the application of the 10% rate.
The TEAC sided with the tax authorities, emphasising that:
- Reduced VAT rates are exceptional and must be interpreted strictly;
- Their purpose is to facilitate access to housing for final consumers, not intermediaries; and
- When a lessee subleases the property, it is acting as an economic operator, not a final consumer.
The TEAC clarified that finance leases with an option to purchase on residential property can only benefit from the reduced rate when the use of the property is exclusively residential. Even if the property is used for residential purposes, the reduced rate is not available where the lessee is acting as an economic intermediary because it is subleasing the property. Although not yet binding precedent, the TEAC decision reflects the current trend of administrative court reasoning on this issue.
VAT Rate on the Sale of Dwellings
In September 2025, the GDT revised its position regarding the VAT rate applicable to the sale of dwellings in light of a Supreme Court decision issued earlier that year (for prior coverage, see the article in the February 2025 issue of Indirect Tax News).Under the Spanish VAT Act, the reduced 10% VAT rate may apply to the transfer of a dwelling if the following requirements are met:
- The dwelling is completed (since the delivery of uncompleted construction follows the regime applicable to the land on which it stands).
- The transaction qualifies as a supply of goods (i.e., the dwelling), rather than services.
- The property is objectively suitable for use as a “dwelling or residence for an individual or a family.”
- Suitability considers not only physical characteristics of the design and construction of the building but also the legal permissibility of residential use.
Early in 2025, the Spanish Supreme Court, referring to previous related resolutions and decisions of the Court of Justice of the European Union, held that suitability must be assessed objectively, not based on administrative formalities. Requiring a certificate of habitation could lead to inconsistent treatment across regions due to varying administrative timelines.
In response to the Supreme Court decision, the DGT has revised its position and announced that a habitation certificate is no longer mandatory to apply the reduced VAT rate. Nevertheless, both the Supreme Court and the DGT have confirmed that the seller is still required to demonstrate the suitability of the construction as a dwelling through any legally valid means. As a result, even though the formal requirements have been eased, from a practical perspective, being in possession of a certificate of habitation will effectively function as a “safe harbour” to allow the application of the reduced VAT rate.
BDO Takeaways
- Subleasing remains a clear barrier to applying the reduced VAT rate in lease‑purchase arrangements. Taxpayers acting as intermediaries should expect the general 21% rate to apply.
- The GDT’s shift on the sale of dwellings offers greater flexibility, reducing reliance on administrative certificates, but documentation remains critical. Sellers should maintain robust evidence of residential suitability to support the application of the reduced rate.
- These developments highlight a broader trend toward strict interpretation of reduced rates while also promoting uniform application across regions.
Alvaro Gomez-Elvira
Andres Diaz
Verònica Targa
BDO in Spain