Value Added Tax (VAT) is a consumption tax applied to goods and services at each stage of production and distribution. It's ultimately paid by the end consumer but collected by businesses on behalf of the government.

How VAT Works

VAT is charged when a business sells goods or services. The business collects VAT from customers and can deduct the VAT it paid on purchases (input VAT) from the VAT it collected on sales (output VAT).

Declaration Methods

• Direct Estimation: Businesses pay VAT based on actual invoicing, subtracting deductible expenses from total profits
• Objective Estimation: Simplified regime using predetermined parameters to calculate tax obligations
• Cash Basis Criterion: For businesses with turnover under €2 million, allowing VAT payment upon receiving payment rather than at service delivery

VAT Rates in Spain

• General VAT (21%): Applies to most goods and services including gyms, hairdressers, clothing, and appliances
• Reduced VAT (10%): Covers food products, water, transportation, and hospitality services
• Super-reduced VAT (4%): Applied to essential items like bread, fruits, vegetables, and medications
• VAT-exempt: Healthcare services, postal stamps, and financial products

Deductible VAT Requirements

To claim VAT deductions, businesses must:

1. Have valid purchase invoices
2. Maintain accurate records in expense and investment books
3. Prove expenses are necessary for business operations
4. Keep proper documentation of all transactions

Important Considerations

• VAT registration is mandatory for businesses exceeding certain turnover thresholds
• Regular filing periods vary by business size and type
• Proper record-keeping is essential for compliance
• Digital systems are increasingly required for VAT reporting

This tax system ensures transparency in commercial transactions while generating government revenue through consumption rather than income taxation.

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