The Constitutional Court’s decision to abolish the capital gains tax paid by municipalities poses a significant threat to the funds of these local administrations. The High Court ruled that the method of calculating the tax base of this tribute, which is fundamental to municipal finances, was unconstitutional. These are the keys to the tax and the consequences of the verdict.
What is capital gains tax?
The Urban Land Value Tax (IIVTNU), more commonly known as the Municipal Capital Gains Tax, is a direct tax that is dependent on and administered by municipalities. It is paid when a taxpayer sells, donates or inherits a home. The tax is levied on the reassessment of the town land on which the house is built from the time of purchase until it is transferred by sale, inheritance or gift.
Who pays for it?
When a house is sold, it is the seller who has to pay the tax since he is the one who receives the money from the sale. However, when donating, the payment of tax corresponds to the person who takes the property. Similarly, when a house is inherited, it is the heirs who must pay municipal capital gains, according to ING in its blog En Naranja. The real estate portal Idealista estimated that the average amount paid by taxpayers ranges from 3,000 to 6,000 euros, “although depending on the cadastral value of the property transferred, the amounts required can be much higher.”
How is it calculated?
Capital gains tax is regulated in Articles 104-110 of the Local Finance Act. In order to calculate capital gains, it is necessary to take into account the cadastral value of the house and the time elapsed between the acquisition of the property and its sale or donation, as described in Article 107 of the aforementioned regulation. In order to obtain the taxable base on which the tax will be applied, revaluation rates are applied, which are set by municipalities and vary according to the years during which the house was owned. These revaluation rates range from a maximum of 3% (for periods up to 20 years) to 3.7% (for holdings of one to five years “. Once the tax base has been determined, a tax rate is also applied to it. set by the City Council, up to a maximum of 30%. The resulting amount is what the taxpayer must pay as capital gains.
For example, a taxpayer who bought an apartment with a cadastral value of €150,000 in 2010 and sells it at the beginning of 2021 should check the valuation of his house. Assuming that your council has set a maximum revaluation rate, for a period of up to 15 years, it corresponds to a rate of 3.2%. Therefore, the revaluation of the house’s cadastral value will be the result of multiplying 3.2 by the 11 years the house has had. The result will be 35.2%, which, with a cadastral value of 150,000 euros, leaves a tax base of 52,800 euros for the case. The tax rate will be applied to this amount. Assuming it was a maximum of 30% in this town hall, this person would have to pay €15,840.
Why does the Constitutional Court overturn the tax?
The high court’s ruling declares “unconstitutional and invalid” three sections of Section 107 of the Local Treasury Law that govern the calculation of the taxable base of the capital gains tax. It reasoned that the tax “establishes an objective method for determining the taxable base of the tax which determines that there has always been an increase in the value of land during the tax period, regardless of whether there has been such an increase and the actual amount of that increase.” In other words, the tax does not always take into account the actual capital gains realized – even if they did occur – because it is based on pre-established tables (cadastre) by municipalities and on the scale established by regulation, without taking into account the real evolution of the value of the land on which the house is built.
What are the consequences?
Because the verdict was not in the fine print, the full text of which has not yet been published, lawyers agree that the ruling gives municipalities the ability to recover tax amounts already appealed. There are still doubts about the scope of the claims. The Financial Users Association (Asufin) believes that the constitutional ordinance gives the ability to claim all capital gains unfairly imposed by municipalities. The Financial Consumer Organization believes that from this court ruling “all self-assessments for the last four years can be claimed.” The association is exploring extraordinary appeals to overturn those settlements that were challenged at the time.
Other lawyers believe that the verdict will affect all transactions signed from now on or cases that have already been appealed. But it will not be retroactive for situations in which it is no longer possible to appeal or where appeals have been decisively rejected in the past. In the same spirit is explained by the lawyer José María Salcedo, partner of Ático Jurídico, who states that “pending the details of the verdict it is also possible that the correction of the self-assessment of the tax presented in the last four years “. These four years are the deadline for appeal in these cases. The lawyer adds that from then on and until the law is changed, the tax may not be levied on data transfers. This legal expert opines, “The verdict may be the result of constitutionalist fatigue with a legislature that has not changed the rules despite numerous warnings from the court.” And adds that “the verdict is checkmate for the legislature, which will now have no choice but to change the tax laws.”
What does this mean for city councils?
According to the latest official statistics published by the Ministry of Finance for 2019, more than 8,000 municipalities in Spain received 2,501 million euros in this tax. This is the second most important own tax figure for local coffers after the property tax ( IBI), for which they contributed around 14 billion euros. Although the impact on public funds is large, municipalities have recorded an overall public surplus of more than 5,000 million euros annually since 2012. In general, the levy that contributes this tax represents between 6% and 8% of total tax revenues. local businesses, according to official data.
Once the final decision is published, municipalities will not be able to collect the tax until the Treasury changes the rules for reforming the tax. Therefore, de facto until then, the tax will be repealed. In any case, municipalities will lose at least three months of revenue – the period until the government manages to fix the rule, which will be a big blow to municipal budgets for the following year.
The president of the Spanish Federation of Municipalities and Provinces (FEMP) and mayor of Vigo, Abel Caballero, has assured that “if the first interpretation is confirmed” of the judgment, when the full sentence is known, “a new norm will be proposed. that allows the tax to be reinstated with the fairness of the levy”. Caballero explained in a statement, “We will proceed to interpret the verdict jointly – with the Ministry of Finance – and ask the Spanish government to jointly analyze the decision”.
For its part, the Madrid City Council has expressed regret that the “inaction” of Pedro Sánchez’s government has led to legal uncertainty over the capital gains tax, for which the capital planned to collect almost 500 million euros in 2021. Municipal sources told Efe that they still do not know the content of the verdict and will wait for its full publication to give an opinion on its implications for the city’s revenues.
The mayors of Estepona, José María García Urbano and Zaragoza, Jorge Azcon, vice president and spokesman for the Popular Group in the FEMP, respectively, have emphasized that this verdict actually means declaring the unconstitutionality of the tribute and “will lead to huge legal consequences. uncertainty and a serious problem for municipalities and provinces for which it will be almost impossible to approve their accounts “.
According to the mayor of Seville, Juan Espadas, the court decision will “accelerate” the text prepared by the Ministry of Finance to recover the tax.
What is Treasury going to do?
The Ministry of Finance and Public Functions, headed by María Jesús Montero, reacted quickly to the Constitutional Court’s decision. In a statement, it assured that “it is finalizing the bill to provide legal security to taxpayers and local organizations.” The Treasury indicates that it “will analyze the decision of the Constitutional Court.” The ministry’s idea is to reform the Local Treasuries Act so that municipalities can continue to collect the tax. However, a few months ago, Montero convened a committee of experts on tax reform that will also rule on this tax figure.
Constitutional doctrine does not allow new taxes to be imposed or substantially reconfigured by decree law. In this case, the change affects the calculation of the tax base, so Treasury would need to evaluate whether it is legally appropriate to use that figure or not, or whether it would have to process the change in accordance with the law. What you could also do is use a rule with legal standing that is currently being processed in Congress, such as the Budget Act, to make the change as an amendment. But we’ll have to wait to see the department’s final decision.