When a company engages exclusively in activities subject to VAT (and not exempt), it can deduct the full amount of VAT paid on its purchases and expenses. However, if the company also carries out exempt operations (which do not grant the right to deduct VAT), the pro rata must be applied to determine what portion of the VAT paid is deductible. This is common in cases such as:
- Educational institutions
- Social and healthcare services
- Some cultural or sports organizations
- Insurance companies
- Financial services
- Leasing of residential properties for habitual use
- Certain real estate transactions
In these cases, the company can only deduct the proportional part, commonly known as the pro rata.
General and Special Pro Rata
Companies affected by this situation can choose between the general pro rata or the special pro rata. Under the general pro rata, the deductible VAT on all purchase invoices is adjusted according to the pro rata percentage. For example, if 70% of a company’s activities are subject to VAT and 30% are exempt, the pro rata would be 70%, meaning the company can only deduct 70% of the VAT paid, with the remaining 30% allocated directly to expenses.
In the special pro rata, the company opts to differentiate the origin of the invoice. If the invoice is related to a deductible service, 100% of the invoice can be deducted. If it’s related to a non-deductible service, none of the VAT can be deducted. For invoices where the distinction is unclear, the pro rata percentage will be applied.
Pro Rata and Odoo
Initially, Odoo Core does not handle pro rata management naturally. One solution would be to manually create the taxes in Odoo, separating each VAT rate. Although this may work functionally, it requires creating a new tax each year since the percentage changes annually. We generally advise against this system due to the complexity it introduces.
The Odoo Community Association (OCA) has developed a module that allows automatic separation of VAT and even enables special pro rata management from version 17 onwards.
Additionally, this module automatically allocates taxes according to the configured pro rata percentage. For example, in an invoice of €100 + €21 VAT with a 70% pro rata applied:
On the accounting information, we will find the following entry:
As we can see, the amount has been automatically divided according to the company’s pro rata.
Pro Rata and Tax Reports
With the proposed method, tax reports will be correctly detailed if we use the community’s tools. It's important to remember that when reporting to some tax authorities, we should only include the portion of VAT that we can deduct.
Furthermore, there’s no need for extra accounting entries, as everything has already been separated correctly in each transaction.