Published: 11-08-2026
The General Rule: Actual and Effective Cost Understood as Material Execution Cost
The Tax on Constructions, Installations and Works (hereinafter, “ICIO”) presents a relevant particularity: although its taxable event is linked to the carrying out of a construction, installation or work subject to the corresponding urban planning control, the tax base is not identified with the total amount of the investment made by the developer. Article 102.1 of the Consolidated Text of the Law Regulating Local Treasuries (TRLRHL) provides that the tax base is constituted by the actual and effective cost of the construction, installation or work, understood as the material execution cost thereof.
The provision itself expressly excludes VAT and other analogous taxes, fees, public prices and other local public patrimonial charges related to the work, professional fees, the contractor’s business profit and, in general, any item that does not strictly form part of the material execution cost. Therefore, the relevant magnitude for ICIO purposes is more limited than the overall economic cost of the project.
Based on this legal definition, determining the tax base requires analysing which items truly constitute a material execution cost of the construction, installation or work and which, conversely, correspond to concepts outside it. This issue becomes particularly relevant where the project includes machinery, furniture or equipment intended for the activity to be carried out in the property.
The Criterion of the Directorate-General for Taxes and Its Application by the Courts
Binding Tax Rulings V0173-22, of 3 February 2022, and V3251-20, of 30 October 2020, define the scope of the ICIO tax base in relation to machinery, furniture and equipment incorporated into a construction. The Directorate-General for Taxes adopts an interpretation linked to the concept of the actual and effective material execution cost of the work, such that, as a general rule, the acquisition value of these elements is excluded from the tax base, without prejudice to the possibility of including the cost of their installation where such installation is materially integrated into the work. Likewise, certain items such as general expenses, industrial profit, safety expenses and quality control expenses are excluded, provided that they can be identified and evidenced.
In this regard, for an item of equipment to form part of the tax base, it is not sufficient that it be necessary for the development of the economic activity. It must be an element that, by its own nature and function, is essential and inseparable from the construction, lacks its own identity with respect to it and is inherent to the conditions necessary for the work to fulfil the purpose for which it is intended.
However, in practice, this criterion has been interpreted more broadly in certain judicial and administrative rulings. In general terms, the courts and the Tax Inspectorate have been applying a functional criterion, assessing whether the use of the element is inseparable from the nature, characteristics and purpose of the property and whether it is indispensable for the property to fulfil the specific purpose for which it was built. In this way, certain elements may be included which, although they have an identity separate from the construction itself, are considered inherent to its use and purpose.
This issue becomes particularly relevant in the case of hotel establishments, where a significant part of the investment may correspond to the equipment necessary for the property to carry out the activity for which it was conceived. Thus, the debate lies in determining whether certain elements should be considered business equipment intended for the operation of the activity and therefore outside the material execution cost, or whether, conversely, their indispensable nature and their connection with the specific purpose of the property justify their inclusion in the ICIO tax base.
In short, the issue should not be resolved solely by reference to whether the element can be physically separated from the construction, but rather by assessing together its nature, its function, its degree of integration into the property and, especially, its indispensable nature for the property to fulfil the purpose for which it is intended. This interpretation nevertheless entails the risk of expanding the concept of material execution cost to include certain elements proper to the equipment and commissioning of the economic activity.
Evidence: A Decisive Element in the Final Assessment
Determining the tax base is not solely a matter of legal classification. There is also an essential evidentiary dimension. Article 103.1 of the TRLRHL provides for a provisional payment on account and establishes that, once the work has been completed and taking into account its actual and effective cost, the City Council may modify the tax base through the corresponding administrative verification.
For this reason, it is advisable to maintain a documentary structure that allows the material execution cost to be separated, from the beginning of the project, from the remaining investment costs. In particular, the budget, the project submitted to obtain the licence, work certifications, invoices from contractors and suppliers and, where applicable, supply and installation contracts must allow the value of the elements and the cost of their installation to be identified separately.
This separation is especially important where the project simultaneously includes civil works, permanent installations, machinery, furniture and business equipment. A generic description of the project as a ‘total investment’ may make it difficult to subsequently evidence which items actually form part of the ICIO tax base.
Conclusion
Administrative and case-law doctrine makes it possible to affirm that the ICIO tax base must be constructed on the basis of a strict concept of material execution cost. The analysis must start from Article 102.1 of the TRLRHL and then examine each specific item, without assuming that every cost economically related to the project forms part of the tax base.
Binding Tax Rulings V0173-22 and V3251-20 reinforce this interpretation: they exclude general expenses, industrial profit, health and safety and quality control, subject to the corresponding evidentiary requirements, and distinguish between the value of machinery or equipment and the cost of its installation.
In complex projects – and particularly in hotels – the most delicate issue lies at the boundary between installations that form part of the construction and equipment elements necessary to operate the activity. The TEAMM resolutions cited highlight the practical relevance of this boundary and advise carrying out an extremely careful, item-by-item analysis.
In short, the fact that an element is necessary for the operation of a business should not, by itself, be sufficient to include it in the tax base. The determining issue will be its true nature, its integration into the work, its inseparable or autonomous character, its permanence and its relationship with the conditions of habitability or use of the property.
If you need assistance or advice regarding the determination of the ICIO tax base, the review of the items that must be included or excluded, or the preparation of the documentation necessary for the tax assessment, at Gentile Law we have a team of experts in local taxation and tax advice ready to assist you.
This publication is for informational purposes only and should not be construed as legal advice.
Contact us:
Lucía Goy Mastromiechele
Founding Partner at Gentile Law
luciagoy@gentile.law
+34 626 118 451
Ana García Ginés
Tax Associate at Gentile Law
anagarcia@gentile.law
+34 604 512 160