In Spain whenever you sold real estate no matter if you had profit or loss you were obliged to file and pay to the Town Hall the Local Ground Tax that burdens the Increase of Value of Urban Land (Impuesto sobre el Incremento del Valor de los Terrenos Urbanos, IIVTNU, also known as Plusvalía Municipal). This tax was based on the revaluation of the urban land on which a property is built between the time it was acquired and the date it is sold. As previously drafted, this meant that there was always a revaluation, despite the fact that in practice the property was sold for a lower price than when it was acquired. This obligation existed even if the sale´s price was lower than the acquisition one due to the fact that according to the applicable Law the taxable base was calculated according to an objective method based on the cadastral value and the years of ownership, having automatically as result a surplus or capital gain.
This formula was challenged at the Constitutional Court and declared in 2017 unconstitutional by Constitutional Court Decision No. 59/2017, confirmed by the Supreme Court Resolution 1163/2018, and recently has become definitive unconstitutional after the resolution from the Constitutional Court 182/2021 of 26th of October 2021. The ruling of last October definitely declared unconstitutional and void articles 107.1, 107.2, and 110.4 of the Law of Local Tax Regulatory Law, Ley Haciendas Locales, based on the fact that the formula used to calculate the tax did not allow proving a result different from that resulting from the application of the valuation rules it contained.
By annulling the calculation of the tax base, the ruling effectively renders ineffective this tax, which represents some 2.5 billion euros per year for Spanish local councils. The Constitutional Court warned in its ruling that “it must now be the legislator (and not this Court) that, in the exercise of its freedom of regulatory configuration, carries out the relevant modifications or adaptations to the legal regime of the tax to bring it into line with the requirements of the Constitution”.
This tax is collected by the local councils, but the regulation depends on the central government, so, last 8th of November 2021 the Spanish government immediately approved by means of an urgent Royal Decree Real Decreto Ley26/2021 , a new way of calculating this tax, on which a large part of the income of local councils, especially the larger ones, depends. The reform, seeks to give “legal certainty” to local councils and taxpayers, replacing the articles of the law annulled by the Constitutional Court, providing a new way of calculating the tax and leaving free from taxation transmissions with losses..
The Royal Decree has established a double alternative to avoid this circumstance, which is the one that has led to its annulment in the Constitutional Court. The first of these is known as the “objective system”. The cadastral value is maintained as a reference, but the percentages used until now are replaced by maximum coefficients depending on the number of years that have passed since the purchase and sale of the property, which will be updated annually, presumably in the articles of the General State Budget law. The local councils will be able to choose between applying this maximum or lower quotients. On this result, the corresponding percentage of the tax, which cannot exceed 30%, would be applied.
The second alternative is known as “real plusvalia “. In this case, the government allows the tax to be calculated on the real capital gain of the land, i.e. the difference between the purchase price and the sale price.
However, the Constitutional Court resolution rules out the possibility of claims for refunds for taxes paid in the last 4 years – the prescription period – and only admit refunds for taxes that have been previously challenged. According to some specialists, this limitation is doubtful, as also is is the fact that the tax reform has been carried out by means of a Royal Decree Law and not by means of an ordinary law, which means that the controversy and law firms and tax advisers are sharpening their knives for the appeals are open to question.
Carlos Espinosa
Solicitor & Tax Adviser
+34 627 41 32 01
carlos.espinosa@iurisnautic.com
