Going over the municipal capital gains tax. Thoughts following the constitutional court ruling
On 26 October 2021, a new setback for the municipal capital gains tax was announced by the Constitutional Court, and while awaiting the publication of the Judgment for a more in-depth analysis, at JLA Notarios we would like to make a few brief reflections on the matter.
The Constitutional Court has agreed to annul part of the articles of the Revised Text of the Local Treasury Law, specifically articles 107.1 second paragraph, 107.2 a) and 107.4, relating to the method of calculation and determination of the taxable base of the municipal capital gains tax.
Firstly, there has been speculation about the possibility of the nullity or unconstitutionality of this tax, but nothing could be further from the truth. The Constitutional Court has not declared the tax itself unconstitutional, but rather the mechanisms used by the Town Councils to calculate the amount to be paid for the said tax, since the Administration had been establishing a value of the land during the period of the tax levy, regardless of whether such increase had occurred and the actual amount of that increase, forcing the taxpayer to pay a tax amount that does not correspond to the socio-economic reality, nor to the taxable event that the tax levies, affecting the principle of economic capacity enshrined in article 31 of the Spanish Constitution.
However, since the tax itself was not declared unconstitutional, but the calculation mechanisms of the capital gains tax were, in practice it is left void of content, at least temporarily until the legislator proceeds to modify the way of calculating the taxable base more in line with the reality of the increase in value of urban land and according to the criteria of the Constitutional Court.
But, what consequences could this have? We understand that, until those provisions are adapted, there will be no taxation by the citizen. Once the Judgment is issued, the calculation methods are left void of content and, consequently, the tax cannot be enforced. However, we consider that from the notaries' point of view, notification to the Town Councils should continue to be made, and it should be included in the deed for its subsequent submission to the Land Registry. The procedure would not change much, but yes, while this void lasts, it will benefit the taxpayer's pocket. However, the publication of the Judgment is still pending and until then the current rules remain fully in force, so it will be necessary to delay the settlements of sales, inheritances and other legal transactions subject to it (within the time limit set by law) in order to gain time until its publication. Fingers crossed.
And what happens if this tax has already been paid? Apparently, the Constitutional Court does not attribute retroactive effects to the Judgment, that is, taxpayers who paid at the time will not benefit from the Judgment and therefore what was paid is "well paid", unless they had filed the appropriate claim. We will see if they finally set a retroactive period or not.
It is positive that the Constitutional Court has annulled such provisions that contradict the economic and social reality and that meant the taxpayer had to pay amounts for a taxable event (the increase in the value of urban land at the time of transfer) that often did not occur or, if it increased, the amount of the increase was set artificially and detrimentally to the citizen. However, there is some criticism if, as it seems, they do not establish retroactivity of their effects, preventing citizens from compensation for the damages caused and which the Constitutional Court itself recognises. That said, it is true that the possibility of massive claims for capital gains already paid by citizens would leave the town councils and the public administration with serious financial problems. But it must be recognised that the capital gains tax, which would be suspended as to payment, was one of the few sources of income that kept small Town Councils afloat and which will now see their resources temporarily reduced. We will see how this turns out. Once the Judgment is published, the ball will be in the legislator's court, who will have to find a way to resolve the calculation method, restore to the municipalities the power to obtain resources to carry out their functions without abusing, with fictitious and artificial calculations, those who always bear the burden.
We hope the Judgment will be published soon so that we can analyse it in more detail, and not have to rely on conjecture, and be able to add a few lines that bring clarity to all who want to read us. We are at your full disposal.
