— A common temptation… and a risky one —
It is a widely shared idea: “put the car, the boat or the house in a company and deduct the VAT and the expenses.” On paper it sounds good, but Spain’s tax authorities have long been tightening the net around so-called instrumental companies: entities that don’t really carry out a genuine economic activity, but exist mainly to cover the private assets and expenses of their shareholder.
A recent ruling from Spain’s Directorate-General for Taxes (DGT) is clear: instrumental companies that only satisfy the private needs of their sole shareholder do not act as businesses for VAT purposes. And that has a direct consequence: if the company is not acting as a business, it cannot deduct the input VAT on those assets and expenses.
— Why this matters (a lot) —
The key lies in the concept of economic activity. VAT is built on the idea that a business buys in order to produce or provide services to the market. When a company merely buys and holds assets for the shareholder’s private enjoyment —a car only they use, a holiday home, a leisure boat— there is no real economic activity and therefore no right to deduct VAT.
Forcing this kind of structure can have serious consequences: on top of repaying the VAT wrongly deducted, there can be surcharges, interest and penalties, and the arrangement can also have knock-on effects in Corporate Tax and in the shareholder’s personal income tax (for the private use of company assets). This is not a theoretical problem: it is one of the usual targets of tax inspections.
This does not mean a company cannot own vehicles, property or equipment. It can —with a full right to deduct— as long as they are genuinely assigned to an economic activity and used accordingly. The line runs between genuine business use and personal use in disguise.
— What this means for you —
If you have —or are thinking of setting up— a company to channel mixed-use or personal assets, it is worth an honest review: is there a real economic activity? Is the asset used for the business or for your private enjoyment? Could you justify it before an inspection? Answering those questions well today saves you a shock tomorrow.
At EBF Consulting we review your company’s structure and tell you clearly which VAT and which expenses are genuinely deductible and which expose you to unnecessary risk. We work with local companies and with international clients who set up companies in Spain, and our goal is the same: to help you save tax safely, not to gamble. If you have doubts about your case, ask us before you deduct.