The Spanish tax authorities criterion on VAT in Flexible Compensation Plans

The General Directorate of Taxes (GDT) from the Spanish Ministry of Finance has resolved, in its Binding Consultation 0366 – 19, of February 20, which has to be the VAT treatment in relation to Flexible Compensation Plans that companies grant to their employees.

Certain benefits are considered as subject to and not exempt from VAT, such as the use of companies’ vehicles, or the grant of restaurant vouchers, which involve, besides the obligation of charging VAT with a formal invoice, its accounting in the VAT Registry books. Other benefits are considered as VAT exempt, such as medical or life insurances, nursery service or training courses.

The fact of carrying out VAT subject and exempt activities leads the GDT to conclude on the application of the pro – rata system in order to determine the company’s deductible input VAT. This criterion implies a new aspect to take into account by employers upon establishing this kind of compensation systems for their employees.

✔ Fringe benefits granted by employers are considered as made for consideration, since they are done in compensation of the services granted by employees. The granting of such benefits is mandatory for employers if they are agreed in the labour contract and the employee elects to such remuneration system, so that a fraction of the employment service is the counterpart of the benefit.

✔ Once determined that such transactions are subject to VAT, the following cases must be distinguished, on the basis that it must be considered that the employer has received and rendered itself such services:

• Nursery services and medical insurance: they are VAT exempt.
• Training courses: these are also considered as VAT exempt if the subject areas are included in any study plan of the Spanish educational system, according to the criterion of the Ministry of Education and Professional Training.
• – In relation to restaurant vouchers, if they can only be changed in restaurants located in the Spanish VAT territory (TAI), they shall be considered as single – purpose vouchers, of which each transfer is considered as the provision of the underlying service by the transferor, irrespective of whether it is the issuer or another entrepreneur. Consequently, if the underlying transaction is subject to VAT in the TAI, the transfer of the voucher is also subject to VAT in such territory. It, therefore, implies that the delivery of restaurant vouchers by the employer company to its employees qualifies as a fringe benefit subject to a 10% VAT rate.

✔ Last but not least, the GDT considers the pro – rata system as applicable, in order to determine the VAT deductible quotes, as the company carries out VAT – exempt transactions, (such as medical insurance, nursery services or training courses) as well as subject to VAT transaction (restaurant vouchers). For the same reason, the GDT deems as appropriate checking on the eventual application of the VAT deduction based on the special system by sector of activity.