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Spain: Unconstitutionality of municipal capital gains

26 April 2017

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The Spanish Constitutional Court (SCC) has reviewed the constitutionality of the different tax provisions at both national and foral region levels, regulating the tax on the increase in urban land value (IIVTNU).

M. Ángeles Pérez de Ayala Esther Zamarriego

On February 16 2017, the SCC handed down a judgment that opens up the possibility of recovering IIVTNU in certain cases.

In that judgment, the SCC analysed certain articles of the IIVTNU Law in Guipúzcoa, regulating the system for calculating the tax base and the Municipal Council's power to inspect the tax. It ruled that they are null and unconstitutional because they levy tax in situations where there is no increase in value.

It should be remembered that IIVTNU taxes the increase in value of urban land, which arises as a consequence of the transfer thereof, or the creation or transfer of rights in rem on that land, over a period of up to 20 years. The rule on quantification of the tax base presumes, without the possibility of correction or proof to the contrary, that over time the transfer of the land will always generate a capital gain.

With this judgment, the SCC has analysed the compliance of those provisions with the ability-to-pay principle recognised by the Spanish Constitution, and the court has ruled that they are unconstitutional and null, but only insofar as they tax situations where there is no value increase, on the grounds that they do not express the ability to pay and they prevent taxpayers from being able to prove that circumstance.

The SCC, without making use of its power to modulate the temporary application of its judgments, has declared the nullity and unconstitutionality of the provisions exclusively for cases where the lack of increase in value of the land can be verified. Consequently, in transfers made in the past for which the taxpayer can prove the lack of increase in value of the land, there could be two basic scenarios:

  • The taxpayer self-assessed the IIVTNU. In general terms, it should be possible to recover the tax paid as long as not more than four years have elapsed since the tax return was filed. If the taxpayer contested the tax assessment, the decision on the claim should follow the interpretation made by the SCC; and/or
  • The IIVTNU was paid as a result of an assessment by the Municipal Council and the taxpayer contested it. The decision on the claim should be based on the judgment of the SCC. If the taxpayer did not contest the assessment and it became final, the possibility of recovering the IIVTNU and the best procedure for doing so will have to be determined on a case-by-case basis.

Additionally, the SCC seems to be validating the method of objective quantification of IIVTNU in cases where there has been an increase in value of the land, regardless of the amount of that increase. However, throughout the judgment, the court recalls that the ability-to-pay principle applies on an individual basis with respect to each person and that the Constitution prohibits confiscation. The court concludes that any tax that exhausts taxable wealth or levies tax on non-existing wealth has a confiscatory result that is contrary to the Constitution.

The above reflection, although not expressly included in the judgment, should permit the revision of IIVTNU paid in transfers in which, as the tax base was determined objectively, the tax has consumed the total profit obtained or has meant a disproportionate levy on the actual gain. Obviously, that will require a careful prior analysis of the particular situation to evaluate the likelihood of success.

As mentioned, the SCC judgment refers exclusively to the law of Guipúzcoa. The SCC has already ruled similarly, in its judgment of March 1 2017, on the unconstitutionality of the rules regulating IIVTNU in Alava. Therefore, it is recommendable to check as soon as possible the IIVTNU paid in the rest of Spain in the past years and assess whether it's appropriate to initiate the corresponding recovery procedure, since the SCC is likely to make a similar interpretation on the IIVTNU provisions applicable throughout the rest of the country.

M. Ángeles Pérez de Ayala ( and Esther Zamarriego (, Madrid

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