In case no. 1020/2019 seeking a declaration of unconstitutionality, the Constitutional Court ruled unanimously that levying the Capital Gains on Urban Land Tax (hereinafter, the "CGULT") when the tax to be paid is higher than the gain actually obtained from the transfer, is a violation of the constitutional principles of economic capacity and non-confiscation.
In this regard, it is also important to point out that the court applied the concept of real net gain; that is to say, the gain obtained after certain expenses and taxes paid to acquire and transfer the property were subtracted. In fact, if one studies the judgment closely, such expenses are precisely the ones that make the gain fall below the tax amount.
However, the court declares that this judgment may only be applied to those settlements that were not yet final on the date the judgment was issued.
To determine whether this judgment is applicable to your situation, we recommend you bear in mind the following:
- When calculating real net gain, it is our opinion that the expenses and taxes paid to acquire the property and to transfer it should all be taken into account. This includes notary fees, any taxes or duties paid, registry fees, etc. In our way of thinking, and despite the fact that the court does not analyse this issue specifically, it also includes the input VAT paid for the acquisition from the start (or from a later date, in cases where there is a subsequent administrative regularisation or a regularisation for investment assets that turned out to be non-deductible).
- The real net gain obtained must be less than the CGULT levied by the relevant city hall.
- The tax settlement/self-assessment can still be challenged through ordinary proceedings, or the case is already subject to litigation proceedings.
In addition, this Judgment must be considered in the context of other recent decisions that have also been laid down regarding the CGULT by both the Constitutional Court and the Supreme Court. The following is a summary of a few:
- Constitutional Court Judgment no. 59/2017, dated 16 February 2017 (See Baker McKenzie's Tax Alert.)
- Supreme Court Judgment no. 1163/2018, dated 9 July 2018 [Appeal no. 6226/2017], inter alia. The court ruled that the so-called "maximalist theory" cannot be applied because it declared the CGULT null and void in its entirety. Therefore, the tax continues to be applicable to any cases where the taxpayer fails to prove that the value of the property did not increase.
- Supreme Court Judgment no. 1314/2019, dated 3 October 2019 [Appeal no. 6347/2018], inter alia. The court ruled that the taxpayer must prove that the value of the relevant property did not increase when it was sold, by using the following means: (a) provide initial or circumstantial evidence that there is a difference between the acquisition value and the sales value, based on the relevant public deeds; (b) have an independent expert issue a report that confirms such circumstantial evidence; or (c) use any other legally accepted means of evidence stipulated under article 106.1 of the Spanish General Taxation Act to show that the value of the property has decreased, thus making it illegal to levy the CGULT.
Despite the foregoing, bear in mind that the levying of municipal taxes on capital gains has not yet been addressed under normal legislation. Furthermore, the Supreme Court must still resolve regarding the following aspects:
i. The calculation of a capital gain based on declared accounting results, pursuant to the criteria established for a different tax, such as the Corporate Income Tax.
ii. If the property's acquisition value should be updated in accordance with the CPI or some other mechanism to correct inflation, in order to prove that the property in question did not actually increase in value.
iii. If it is permissible to revise past liquidations of CGULT issued to the taxpayer before the Constitutional Court resolution, liquidations that became final —given that they were not appealed within the envisaged term—, in a situation where the increase of value was not proved.