DGT analyzes VAT implications of refit & repair for vessels with Union goods status

Spain - 12 / 16 / 2019

In refit and repair transactions performed at Spanish shipyards on ships having Union goods status the Spanish VAT standpoint must be taken into account.

Any refit and repair work on a vessel usually involves labor and materials.

To determine whether a specific transaction performed as part of refit and repair work is subject to VAT in Spain it first needs to be seen whether that transaction must be regarded as a supply of goods or services. This is because depending on the characteristics each case brings the Spanish place-of-supply rules for supplies of goods or services may be applicable.

The DGT (Directorate General for Taxes) gave its view on this subject in its reply to request for a binding resolution number V0656-16, by explaining that to be able to characterize a refit and repair transaction on a vessel correctly, the relative importance must be examined in each individual case of the elements contributed by the client with respect to those contributed by the supplier.

Namely, where a supplier contributes all the materials, or those contributed by the client are insufficient or represent a small part of the end product, the transaction must be characterized as a supply of goods. Otherwise, if it is the client that contributes all the materials, or those contributed by the supplier are insignificant or represent a small part of the end product, then we have a supply of services.

In other words, if a supplier provides and installs a new electronic system on a vessel, that transaction must be classed as a supply of goods. If, however, painting work is carried out on a boat, since in theory the elements contributed by the supplier will be insignificant in comparison with the work performed, that transaction must be classed as a supply of services.

That said, after characterizing the transaction as a supply of goods or services, it has to be analyzed in each case when the transaction is deemed to take place in Spanish VAT territory and therefore whether or not VAT is chargeable on it in Spain.

In relation to transactions characterized as supplies of goods, it must be taken into account that where they form part of refit and repair work on a vessel, they will always be preceded by installation or assembly work on that vessel, and therefore article 68.2.2 of VAT Law 37/1992, of December 28, 1992 applies, which determines that supplies of goods needing to be installed or assembled before being handed over to the person acquiring them are subject to VAT in Spain where the installation is finalized in Spain, and whenever that installation or assembly implies permanent attachment of the delivered goods.

Elsewhere, regarding transactions characterized as supplies of services, made as part of refit and repair work on a vessel, to conclude whether they are subject to VAT in Spain, a distinction is needed among the following scenarios:

Where the customer for the services acts as a trader or professional:

If the customer is established in Spanish VAT territory, the supply of services is subject to VAT in Spain.
If the customer is established for VAT purposes in another EU member state, the supply of services is not subject to Spanish VAT.
If the customer is established outside the EU VAT area, the supply of services is not subject to Spanish VAT either.

Where the customer for the services does not act as a trader or professional, the supply of services is regarded to take place in all cases in Spanish VAT territory and therefore the transaction is subject to VAT in Spain.

It is therefore crucial in refit and repair transactions on vessels at Spanish shipyards to analyze the specific transaction from the standpoint of Spanish VAT, to prevent inefficiencies that may give rise to a cost that cannot be recovered for the customer and could also lower the supplier's ability to compete with other suppliers that do apply VAT law correctly.