The municipal capital gains tax has been the subject of numerous contestations, which have led to its recent declaration of unconstitutionality. Its method of calculating the tax quota tends to produce results that are unrelated to the real value of the real estate market, which leads to a breach of the principle of economic capacity.
As a consequence, the taxpayers who have to pay the tax or who have appealed it may recover their money or be exempted from their obligation to pay. The details, which were anticipated in our previous article on the unconstitutionality of the tax, are set out below.
What is the municipal capital gain?
The municipal capital gains tax is the tax on the increase in value of urban land. This is a municipal tax accrued at the time of transfer of real rights over urban land.
As its name suggests, the tax is levied on the increase in value of the land. This may derive from an increase in market prices, improvements made by the City Council or from public services… whatever the case may be, it represents an indirect enrichment of the taxpayer.
The tax rate is determined based on the cadastre value of the land and the tax rate approved by the City Council. This method of calculation has presented different problems recently.
The debate on the legality of the tax
In 2017, the Constitutional Court delivered on the municipal capital gains tax. In this first pronouncement, the TC indicated that in cases where there was no increase in value, it was unconstitutional to require payment of the tax.
Sometimes, the way in which the tax was calculated meant that the taxpayer paid it without there being an actual increase in value. This was in contradiction with the principle of economic capacity established in art. 31st of the Constitution.
Again, in 2019 the Constitutional Court pronounced itself correcting another assumption similar to the previous one. In this case, it indicated that it was unconstitutional to demand a tax rate disproportionate to the increase in assets.
The current situation: unconstitutionality of the capital gains tax
As seen before, in both sentences, the taxpayer was protected against situations in which the payment of the tax was disproportionate to the economic capacity demonstrated.
For this reason, on October 26, the Constitutional Court returned to the issue to indicate that the method of calculating the tax is invalid because it is unconstitutional. All this because the current regulation leads to results that are notably distant from the real values of the properties in the real estate market.
What has the Government done?
After knowing the Sentence, the Government has taken this Monday 08/11/2021 to the Council of Ministers, a new edit of the norm that calculates the Municipal Capital Gains Tax, for the City Councils. The regulation has been included in a Royal Decree Law that will be published this week in the BOE, when it will come into force. The Ministry of Finance has replaced and annulled the articles that were declared unconstitutional by the TC, giving legal coverage to the new regulation, and thus, allowing its collection to the City Councils, from this new Royal Decree.
How will the calculation be made?
As we have indicated, the capital gains tax is levied on the taxation of the revaluation that has taken place in the urban land on which a property is built, from the time it was acquired and the date on which it is transferred. The way in which the rule had been drafted at the beginning, it was assumed that there was always a revaluation, even in cases of capital loss, that is, when the taxpayer lost money on the sale.
Currently, a double alternative has been conceived to avoid this eventuality, which is precisely the one that has given rise to the annulment of the Tax by the Constitutional Court.
- First alternative: known as the “objective system“. It maintains the cadaster value as a reference, but the percentages used up to now are replaced by maximum coefficients depending on the years that have passed since the purchase and sale of the property, which would be updated annually, most certainly, by regulating it in the articles of the General State Budget Law. The City Councils will be able to choose between applying these maximum or lower quotients. On this result, the corresponding percentage of the tax would be applied, which cannot exceed 30%.
- Second alternative: known as “real capital gain“. In this case, the regulation 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.
Which of the 2 calculations will be applied?
If the taxpayer is able to prove that paying the “real capital gain” tax provides them with more tax benefits, they may request such taxation to their city council, which will proceed to carry out the relevant verifications in this respect. Thus, the obligation of payment is eliminated in those cases in which the tax is higher than the increase in value.
How to recover the municipal capital gain?
Some taxpayers will be able to recover the municipal capital gain. To do so, it is essential to have filed a claim or rectification of the self-liquidation or to be within the deadline.
Thus, this sentence does not benefit those who have paid the tax without objections, those who have claimed it through the courts after a final judgment or those who have paid the tax more than four years ago.
If you are not in these circumstances, we recommend you to contact us to study your case and inform you about whether you can claim your capital gains tax now that it has been declared unconstitutional.