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Regulatory developments 2017

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VAT applicable to free legal aid services

Services rendered by lawyers and solicitors to persons entitled to free legal services under Act 1/1996 of 10 January governing free legal aid are subject to and not exempt from VATand all invoices for such services should include VAT at the general rate of 21%.

The General Directorate of Taxes (hereinafter DGT) in Resolution of June 18, 1986 (BOE of June 25) considered that these services were not subject to VAT as they were provided on a mandatory and free basis under article 7.10 of the Law. 37/1992, on Value Added Tax (hereinafter LIVA).

However, this Executive Centre changed its criteria in its consultations V0173-17 and V0179-17 of 25 January 2017, supporting by the sentence passed by the European Court of Justice on 16 June 2016, Case C-543/14, in which free legal aid services were deemed to be of an onerous nature.

Doctrine applied by the DGT from 26 January 2017

The DGT changes its criteria based on the European Court of Justice ruling of 28 July 2016, Case C-543/14. This sentence analyses the VATability of legal defence services rendered by Belgian lawyers and, in particular, free legal aid, based on the following facts:

  • The free legal assistance service is rendered voluntarily (paragraph 64)
  • The service is not free of charge, but rather the fees are paid by the Belgian State (paragraph 25)

The sentence establishes, firstly, the VATability of legal defence services in accordance with articles 1.2 and 2.1.c) of the VAT Directive, deeming them to not entail an increase in procedural expenses to the point of representing an insurmountable obstacle to accessing justice. Secondly, it declares free legal aid services not exempt from VAT since the activity performed by the lawyers and solicitors is not social in nature.

The DGT considers this sentence applicable to the Spanish legal-aid lawyers system, determining the onerousness of these services to the extent that they are paid for not by the beneficiaries of the legal aid but rather by a third party, in this case the corresponding Public Administration.

Therefore, services rendered by Lawyers and Solicitors to persons entitled to free legal services are subject to and not exempt from VAT. Invoices should charge the beneficiary VAT at the general rate of 21% and the gross tax base shall be the remuneration received from public funds on account of their intervention in the corresponding legal proceedings.

In accordance with the principle of legal certainty, this new criteria is binding for the Tax Agency in relation to the obligations met and rights exercised by the taxpayer from 26 January 2017, date of publication of the aforementioned consultations, in relation to transactions accrued after that date.