Partial unconstitutionality of municipal capital gains tax

The regulation governing municipal capital gains tax – the official name of which is Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana (IIVTNU), or Tax on the Increase in Value of Urban Land- states that this tax encumbers the increase in value of a piece of land, as indicated in its sale for any reason (sale, donation, inheritance, etc.).

However, this regulation does not foresee the possibility that the transfer might not involve an increase in the value of the land because, according to regulations, capital gains are determined objectively by applying the tax rate established by the Council to the taxable base (determined as the assessed value of the property or land at the time of the sale, corrected by certain annual % according to the number of years of ownership).

Determining this tax using current regulations involves taxation of the capital gains that under no circumstances respects the principle of financial capacity included in Art. 31.1 of the Spanish Constitution.

The sentence issued by the Constitutional Court on 11 March 2017 declared municipal capital gains tax to be unconstitutional in cases where there is no increase in the value of the land from the acquisition to the transfer of the property, declaring several of the articles governing this tax null and void. It must be noted that this sentence does not mean that capital gains must not be declared and paid on the sale of any property or land, but instead that it is expressly not subject to capital gains taxation in cases where there is a decrease in the value of the land.
As a result, taxpayers (individuals and legal entities) to have sold a property or land at a loss over recent years are entitled to claim the nullity of the tax paid and request a refund.
The steps towards recovering municipal capital gains tax will depend on the way in which it was paid by the taxpayer:

• The taxpayer submitted self-settlement of the tax. Correction of the self-settlement submitted can be requested and a refund of any undue payments claimed. There is a period of 4 years for this, as of the date of the deadline for submitting this self-settlement.

• The taxpayer received settlement issued by the Council. The taxpayer only had one month to challenge the settlement. Where it was not challenged within this period, the settlement became final and the possibilities of cancelling it more remote.

In any case of a claim, the taxpayer must prove that the sale was made at a loss and, therefore, the primary precept of taxation on capital gains is not fulfilled, i.e. encumbrance on the increase in value of the urban land.

According to the Sentence of the Supreme Court, only very basic proof is required, which might be the deeds of purchase and transfer of the land. Likewise, despite not being obligatory proof, it is wise to also provide evidence from an expert or a valuation.

On 9 March 2018, the Official Journal of the Spanish Parliament published the draft bill amending the consolidated text of the Law Regulating Local Taxation, approved by Royal Legislative Decree 2/2004 of 5 March (law governing capital gains taxation) to seek compliance with the mandate that the Sentence of the Constitutional Court sent to the legislator by declaring Art. 107.1, 107.2.a) and 110.4 of TRLHL unconstitutional and null and void, introducing a new case of non-liability where the taxpayer proves that they have not obtained an increase in value.

Furthermore, the annual percentages applicable to the value of the land to determine the taxable base of the tax were replaced in this draft bill with maximum coefficients established according to the number of years of ownership of the land and will be updated on a yearly basis, by way of a binding rule considering the evolution of the property market and security adjustment coefficients. Finally, as a result of the introduction of this case of non-liability, it is stated that the Councils may make the corresponding verifications.

In light of the current situation, AddVANTE recommends you start the procedure to request a refund of any municipal capital gains tax to ensure your rights to obtain said refund do not lapse. We offer our services to study your case in detail and weigh up the most appropriate action to take in your situation.