- As recalled by the Spanish Directorate General for Taxes (DGT), the Tax on Constructions, Installations and Works (ICIO) does not tax the performance of an industrial or productive activity but rather the realization of an installation, construction, or work.
The taxable event for the ICIO consists of carrying out any construction, installation, or work for which the corresponding building or urban planning license must be obtained, regardless of whether said license has been obtained or not. The taxable base of the tax is constituted by the actual and effective cost of the construction, installation, or work, understood as the material execution cost thereof. This definition expressly excludes VAT and similar taxes, public fees, public prices, and other public financial contributions of a local nature related, where applicable, to the construction, installation, or work, as well as professional fees, the contractor’s business profit, and any other items that do not strictly constitute the material execution cost.
Royal Legislative Decree 2/2004, of March 5, which approves the revised text of the Law Regulating Local Finances, does not regulate in detail what is meant by “material execution cost of the work,” leading to extensive administrative and judicial interpretation.
The interpretation of the Supreme Court on this matter has been as follows:
a) The actual and effective cost of the work includes the cost of civil works, and the corresponding components of equipment, machinery, and installations constructed, placed, or carried out as physically inseparable technical elements of the work, and part of the same project that served to request and obtain the corresponding license, such as plumbing and sanitary installations, electricity, HVAC, special installations, and glazing.
b) However, the cost of acquiring equipment, machinery, and mechanical installations constructed by third parties outside the work and incorporated into it, which do not themselves require urban planning licenses, is not included in this concept and, therefore, in the taxable base of the ICIO. Nevertheless, the cost of their installation must be included.
c) In the case of wind and photovoltaic installations, the Supreme Court made an additional clarification: the exclusion of the ICIO tax base for machinery constructed by third parties and installed in the work (in this case, turbines or wind generators) should not depend solely on whether the machinery is physically separable from the work, but whether it is necessary to fulfill the purpose of the larger installation for which the license is requested. The Court concluded, therefore, that the acquisition cost of the wind generators forms part of the taxable base, as these constitute, in themselves, the entire installation for which the license is sought.
Separability is thus interpreted from the perspective of functional autonomy, understood as the necessity of having certain machinery or installations constructed by third parties to fulfill the purpose of the work for which the license is requested.
Higher courts of justice have adopted an extensive interpretation of the Supreme Court’s conclusions to include in the tax base of the ICIO machinery specific to industrial or commercial processes installed within a larger work for which a license is sought, such as, for example, display cases, murals, cabinets, and freezers of a supermarket, which, despite being removable elements of the work (physical separability), have been considered essential for the exercise of that activity (functional autonomy).
In this context, the DGT, in its binding ruling V0266-24, dated February 29, offers an orderly and integrative interpretation of the evolving doctrine of the Supreme Court (as it had partly attempted in its binding resolution V0173-22), reaching an interesting conclusion. The case analyzed concerns the refurbishment of an industrial premises with the installation of machinery necessary for the production process.
The DGT concludes that the installation may be included in the ICIO tax base if it can be defined as a “taxable installation” (i.e., “necessarily subject to a building or urban planning license”), otherwise, the requirement contained in the taxable event of the tax would not be met.
In short, two requirements must be met to include the value of the machinery in the tax base:
a) The installation of the industrial machinery alone (regardless of the refurbishment of the premises) must be subject to a building or urban planning license (thus constituting the taxable event of the tax).
b) Moreover, the machinery must be inherent to the premises and necessary to serve the construction of essential elements for its use, “regardless of whether the machines are essential for the development of the production process that will be carried out in the warehouse once the construction is finished.”
In other words, following the doctrine of the Supreme Court, the DGT interprets that the ICIO does not tax the performance of an industrial or productive activity but rather the realization of a construction, installation, or work. With this conclusion, it seems that the Administration is reverting to an interpretation that had appeared forgotten, whereby machinery associated with the execution or expansion of an industrial warehouse (related to the production process to be developed therein) may be considered independent of the construction itself for which the license is requested. As long as no license is required for its installation and it is not inherent to the work, it will not be included in the taxable base of the tax.
