Recovering Spanish VAT under the 13th Directive: The challenge of reciprocity

As the deadline approaches for the filing of form 361 by those non-EU business applying for the refund of the Spanish VAT the may have incurred during the previous year on occasion of their operative in Spain, it seems timely to revisit a persistent problem in this area: the requirement of reciprocity by article 119bis of the Spanish VAT Act, that transposes the special VAT refund procedure regulated in the Council Directive 86/560 EEC (Thirteenth Directive).

The legal framework

When regulating the conditions for the refund of the VAT incurred in Spain by non-EU businesses that are not eligible for the general VAT regime, article 119, paragraph one (2º) of the Spanish VAT Act provides that “the recognition of the existence of reciprocity of treatment… shall be made by resolution of the Directorate General of Taxes”.

A literal reading of this provision may lead to conclude that the reciprocity is neither presumed nor can be demonstrated by the taxpayer himself through documentation, as the law explicitly conditions eligibility for the VAT refund through this special procedure on the existence of a formal resolution from the General Tax Directorate (DGT) confirming that the applicant’s country of establishment grants equivalent VAT refund rights to Spanish businesses.

The practical consequence

Should this literal interpretation of the reciprocity requirement be accepted, a difficult situation would arise: what happens when there is no formal recognition as happens for most non-EU countries, given the sluggishness of the Spanish tax administration in the issuing of the required resolution where the reciprocity is acknowledged (Note).

The practical consequence of this literal interpretation would be that, in the absence of a DGT resolution, the business operating from a non-EU country would be excluded from the possibility to recover the Spanish VAT through the special VAT refund procedure by Form 361.

This is the position adopted by the Spanish tax authorities and consistently endorsed by the Spanish Economic-Administrative Courts, with no contradiction, so far, by domestic case law. As a result, refund applications through form 361 by non-EU businesses are routinely denied in cases where no DGT reciprocity resolution is available.

A restrictive interpretation to be challenged

In our opinion there is ground to disagree with this formal interpretation of the reciprocity requisite based in a literal reading of the law. Instead, a finalist interpretation of the 13^th Directive and the way in which it has been transposed in Spain could lead to a more flexible interpretation where, meanwhile the taxpayer would be charged with the burden of the proof as to the existence of reciprocity, the mere absence of a DGT resolution should not extinguish the taxpayer’s right for applying for the VAT refund.

As has been pointed out, this alternative interpretation would be consistent with:

• The literality of 13th Directive when regulating the possibility that Member States impose specific obligation not specially mentioned in the Directive with the purpose of determining whether an application is justified or to prevent fraud. The authorization being finalist and not discretional, would preclude a situation where the conditions introduced by the Member State result in the setting up of disproportionate barriers for the recovery of the VAT by the third-Country business.

It must be remembered that the ultimate purpose of the 13th Directive is the “need to assure the harmonious development of trade relations between the Community and third countries based on the provisions of Directive 79/1072/EEC -the 8^th Directive that applies for the VAT refund EU business when non-established in another Member State- while taking into account the varying situations encountered in third countries”.

In line with this objective of avoiding differences of the treatment of VAT refunds between EU and non-EU businesses when operating as non-established in any Member State, article 3, 2 of the 13^th Directive states that: “Refunds may not be granted under conditions more favourable than those applied to Community taxable persons”. It is not reasonable to conclude that, because it is not expressly regulated in the Directive, the contrary situation would be justifiable, namely: that the VAT refund to a EU business is granted under more favourable conditions that those to a non-EU business.

• The literality of article 119.bis of the Spanish VAT act, which does not necessarily support the conclusion that the lack of formal recognition by a DGT resolution equates to the forfeiture of the right to obtain the VAT refund.

• The wording of the existing DGT resolutions where reciprocity is declared, according to which the consequence of recognition is that …there is no need to provide justifying supporting documentation” that proof the existence of reciprocity.

Contrario sensu, the conclusion can be no other that, in absence of such a resolution, the non-EU applicant for the VAT refund through form 361 would not be relieved from having to provide evidence about the existence of reciprocity.

• It is moreover to be mentioned that the concepts of reciprocity and of the burden of the proof should be interpreted with certain flexibility, considering:

• The finalist approach adopted for the interpretation of the DGT resolution of 4-1-2021 that declares the reciprocity with United Kingdom and Northern Ireland, that is made in the binding consultation V0072-22.

• The principle in the Spanish administrative law of proximity to the evidence, according to which the Spanish Administration would be in a better place than the taxpayer to investigate the reciprocity of treatment afforded by the tax Administration of the corresponding non-EU country.

Lastly, this broader, purposive interpretation finds support in the basic principles that undergo the European and Spanish law, namely:

• Substance over form, as sentenced by the CJEU in Case C-562/17, Nestrade SA, by favouring a substantive approach over excessive formalism.

• The good faith and the legitimate confidence internal principles that are to govern the relationships between the Spanish Administration and the citizens, in line with the more general principle of law precluding that no one should benefit from their own negligence, as would be here the case given the lack of initiative by Spanish the Administration in the issuing of resolutions to formally declare reciprocity.

Overview and conclusion

Despite these arguments, the reality is sobering as, in the current administrative practice, refund claims filed through Form 361 by taxpayers operating from non-EU countries without a reciprocity resolution, are almost certain to be denied.

In practice, as should be the case for any new operative, this situation makes it advisable for any non-EU businesses intending to start its operations in Spain, to previously identify the VAT implications of their business workflows and the existing alternatives, so to avoid having to face a scenario where the incurred VAT cannot be recovered or, at the best,  recovered after a long dispute.

For non-EU businesses having already incurred Spanish VAT, the implications are clear. While filing Form 361 remains formally possible, in the absence of a DGT reciprocity resolution the chances of success are slim. Companies must carefully evaluate their position, consider providing reciprocity evidence proactively, and - where significant amounts are at stake - be prepared to challenge denials in court, knowing that success will require litigation before Spanish courts, which up to date have not sided with the more flexible interpretation suggested in this article, and ultimately continue until there is a pronouncement from the Court of Justice of the European Union as to whether the literal interpretation of the reciprocity condition introduced by the Spanish law is compatible with the objectives and principles of the 13th Directive.

(Note) Canada (resolution DGT 16-5-94), Israel (resolution DGT CV 5-10-06), Japan (DGT 10-9-96), Monaco (resolution DGT 24-3-94), Norway (resolution DGT 16-9-03), Switzerland (resolution DGT 23-9-96) United Kingdom and Northern Ireland (resolution DGT 4-1-21).