This piece explains when a contractor can recover a provisional construction tax payment after a publicly procured urban works contract is cancelled before construction starts.
The ruling removes a licence-based obstacle
Spain’s Supreme Court has ruled that local authorities cannot retain the provisional Impuesto sobre Construcciones, Instalaciones y Obras, or ICIO, when contracted works never begin and the contract is rescinded. The court’s doctrine allows a contractor acting as the legal substitute for the works owner to seek repayment of the amount paid in advance, without first waiting for the relevant urban planning licence to be formally declared expired. The decision arose from Ferrovial Construcción’s dispute with Madrid City Council over the planned reform of the paediatric intensive care unit at Hospital Universitario La Paz. The judgment establishes that the tax consequence turns on whether the work was materially carried out, rather than solely on the continuing formal status of the licence.
How the public works tax mechanism operates
ICIO may be collected provisionally when a licence is issued, but the Supreme Court distinguishes that advance payment from the tax liability itself. The taxable event is the material execution of the building, installation or work, and the tax becomes due when work starts. If construction never begins, the principal tax obligation does not arise and the provisional payment becomes an undue payment capable of being refunded. This is relevant to public procurement because a contractor can be the substitute taxpayer, paying the tax on behalf of the owner of the work. A contract award, a payment and a licence therefore do not by themselves prove that the taxable event occurred.
The La Paz contract tested the principle
The Madrid dispute began in 2017, when the Servicio Madrileño de Salud awarded Ferrovial the interior refurbishment of the paediatric intensive care unit at La Paz. Ferrovial paid 103,617 euros provisionally before obtaining the permit, but administrative delays postponed the licence for almost a year. The hospital and the contractor then signed negative setting-out records and mutually rescinded the contract in September 2018, declaring that no work had been carried out. The project was later tendered to OHL under a new project and licence, with the tax assessed again. Although Madrid’s own tax inspectors found that construction had not started, the council rejected the refund because the original licence had not been declared expired and no formal prior renunciation had been made by the owner.
Rescission can establish that work will not proceed
The Supreme Court accepted Ferrovial’s appeal and rejected the council’s position. The judgment says the contractual rescission provided sufficiently clear evidence of the decision to abandon the project and the certainty that the works would not be performed by that company. Requiring a separate expiry procedure before repayment, the court said, would place the taxpayer’s rights at the mercy of administrative will and delay. For bidders and contracting authorities, the transferable point is that the tax treatment of a cancelled works contract must reflect the project’s material reality. Where no construction has started, a formal licence may not by itself justify holding the provisional payment.
IN NUMBERS
The judgment concerns the ICIO payment linked to the cancelled La Paz contract. It does not remove the need to establish that the works were not carried out, but it prevents a local authority from making repayment depend solely on the formal expiry of a licence.
Reported from expansion.com, 2026-11-03. The Tender Wire is published by Otnox.
