The Spanish municipal tax on the increase in value of urban land is declared unconstitutional

Background

Prior to the ruling dated October 26 2021, the Spanish Constitutional Court had already issued prior rulings, although with limited effects, on the constitutionality of certain articles of Royal Legislative Decree 2/2004, dated March 5, approving the consolidated text of the Law on Local Taxation (LHL in Spanish). Such Law regulates the IIVNTU.

• In its ruling (nº59/2017) dated May 11 2017, the Spanish Constitutional Court considered articles 107.1 and 107.2.a) LHL to be unconstitutional. However, this finding of unconstitutionality affected these articles only insofar as they allowed for the tax to be due in transfers of land where there had been no capital gain. Article 110.4 LHL was also considered unconstitutional as it did not enable taxpayers to provide evidence on this lack of capital gain.
• Subsequently, in its ruling (nº126/2019) dated October 31 2019, the Constitutional Court found article 107.4 LHL to be unconstitutional although only in such cases where the tax due was above the capital gain effectively derived by the taxpayer.

The Constitutional Court ruling (182/2021), in contrast, considers that the method for calculating the tax is unconstitutional in all events and has declared that the articles regulating this calculation system (articles 107.1 paragraph two, 107.2.a and 107.4 LHL) are null and void. The finding is based on the fact that the objective and compulsory calculation method these articles provide is contrary to the constitutional principle of correct assessment of taxpayers' economic means and is not in line with the real estate market. By way of example, in the set of facts on which the ruling was issued, the municipal tax amounted to a significant proportion (60%) of the effective capital gain obtained by the taxpayer in the transfer of the land.

The ruling results in a legal vacuum, as there would be (until the amendment of the LHL) no legal provisions on how to determine the taxable base of the IIVTNU. For practical purposes, this implies that the tax may not be collected (although the government has hurriedly enacted an amendment to the LHL to fill the gap).

It is worth noting that the Constitutional Court has significantly reduced the extent and effects of its ruling, creating controversy and doubts as to its practical application and its timing constraints.

Extent and effects of the ruling

According to the Spanish Constitutional Court, the ruling will apply to the situations which have not been finally resolved through a judgment which has the force of res judicata or through a final administrative decision. In this context, it is worth highlighting (and is especially controversial) that the Court:

1. considers that tax assessments or returns which have not been contested at the date of the ruling should be equated to final situations finally resolved; and
2. establishes that the date of the ruling (October 26 2021) should mark the deadline for its effects, instead of the date of the publication in the Spanish Official Gazette. This last date should be the date taken into account in accordance with the law regulating the Constitutional Court.

On a literal reading, therefore, only those situations contested before October 26 2021 may be reviewed on the basis of the ruling. On the contrary, tax assessments or returns not contested by October 26 2021 may not be reviewed on the basis of the ruling, even in such cases where the time-period to appeal would not have elapsed (although such assessments or returns may still be contested on the different basis).

However and as noted above, the Constitutional court ruling is controversial in some of its aspects and its effects and practical consequences have yet to be determined. In this context, it is doubtful whether the ruling would apply to, among other, the following situations:

• assessments and returns under review or audit at the date of the ruling;
• assessments and returns, not contested or appealed at the date of the ruling (October 26 2021), but where the appeals or corresponding proceedings have been filed at the date of publication of the ruling in the Official Gazette.

LHL amendment

The government has finally followed the directions from the Constitutional Court and has amended the LHL, by enacting Royal Decree 26/2021, dated November 8.

The IIVTNU reform enacted by the government applies as from November 10 2021. As such, all taxable events occurring as from the date of the Constitutional Court ruling (October 26 2021) and November 9 2021 should not be subject to IIVTNU.

The main features of this reform are as follows:

• Cases, where the taxpayer can show (through the deeds of acquisition and of transfer) that there has not been a capital gain in the transfer of land, are not subject to the tax.
• For these purposes, the acquisition or the transfer values will be the greater of (i) the value reflected in the corresponding deed or (ii) the value assessed by the Authorities. Moreover, in order to determine the portion of such value which should be attributed to the land, the taxpayer should refer to the proportions established for cadastral valuation purposes.
• Through the above rules, the taxpayer is allowed to show a capital gain lower than that resulting from the objective formula.