Spanish court rules the plusvalía capital gains tax unconstitutional

Spanish court rules the plusvalía capital gains tax unconstitutional

The Spanish Constitutional Court has ruled that the municipal capital gains tax, a tax that is levied when a property is sold or inherited, is unconstitutional.

The Incremento del Valor de los Terrenos de Naturaleza Urbana, also known as plusvalía municipal, is applied when any property changes hands.

In the case of a sale, the seller must assume the cost, while it is the acquirer who must pay if the property is received through inheritance or as a gift.

On average, the amount of tax payable is between 3,000 and 6,000 euros. However, it could be much higher than that. It is one of the biggest sources of revenue for local councils, after the IBI local council tax in the first place.

However, this recent ruling states that the way of calculating the tax is now invalid, according to Article 31 of the Spanish Constitution. This is because the calculation always assumes that there has been an increase in value when the land is transferred, regardless of whether such an increase actually took place – or the amount.

The plusvalía tax is calculated using the cadastral value from the time of purchase until its transfer, meaning that tax is always payable, regardless of whether a loss was made on the transfer. For this reason, this tax has always been the subject of much controversy.

Could refunds be due?

This ruling will affect all transactions made from now on or those which are still pending resolution in the courts. It is not expected to be applied retrospectively.

That said, this will depend on the final ruling which will be published in the coming weeks and could open the door to taxes unduly paid being returned.

To many observers, this is the final nail in the coffin for the plusvalía tax – at least in its current state. In fact, the Constitutional Court has ruled against it twice already in the past, declaring it contrary to the Constitution in cases where there had been no increase in value (ruling of 11 May 2017), and where the tax to be paid was higher than the gain obtained (31 October 2019).

Backslash from local councils

Unsurprisingly this news came as a massive blow to local authorities all across Spain. Town and city halls across the country stand to lose a combined estimated 2.5 billion euros annually should the plusvalía tax be scrapped.

Aware of this, the Ministry of Finance and Civil Service announced in the hours following the ruling that it was finalising “a legal draft that will guarantee the constitutionality of the tax, offer legal certainty to taxpayers and certainty to local councils”.

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