Court ruling could facilitate recovery of Spanish municipal capital gains tax payments

Ignacio Guerra	Gonzalo Rincon de Pablo

The Constitutional Court will be handing down a judgment in the coming months on whether the application of the IIVTNU is constitutional.

Background

IIVTNU is a direct tax. As the name indicates, in principle, the tax should be levied on the increase in the value of land at the time of transfer of the real estate.

Due to the economic crisis in Spain and, in particular, the bottoming-out of the Spanish real estate market, IIVTNU has become a highly disputable tax, especially in cases where real estate is transferred "at a loss" (a common circumstance in the past few years).

Based on the literal wording of the rules applied for determining the IIVTNU, there is always a tax charge, even when the taxpayer has incurred a loss on the transfer. This is because, unlike other direct taxes, the IIVTNU is not indexed to or determined on an actual gain generated by the transferred asset (generally, the difference between its cost for the seller and the final sale price). Instead, it is calculated as the product of the cadastral value of the urban land at the transfer date multiplied by a fixed coefficient that depends on the ownership period of the property (without exceeding 20 years).

As such, the legislation on calculating the taxable event of the IIVTNU is a "legal fiction", which in all cases results in a tax charge because it is based on the irrebuttable assumption that the transfer of land over time will always generate a gain (the longer the period of ownership by the taxpayer, the greater the gain). As has been proven, this "legal fiction" is often far from reality.

Cases

From a legal-technical viewpoint, the interpretation set forth in most case law on this matter is that the levying the IIVTNU where an actual loss has been made on the transfer of property (in the portion corresponding to the land) is contrary, not only to the definition of the taxable event, but also to the constitutional "ability-to-pay" principle. The same conclusion may be reached in those cases where there is a gain obtained by the taxpayer on the transfer, but it is lower than the tax liability when applying the literal wording of the rules of this tax.

Therefore, although the rulings and case law of the Spanish tax authorities and courts are not uniform on this question, the Supreme Court, in a judgment, issued in September 22 1995, and the high courts in numerous subsequent decisions have already ruled in favor of the taxpayer in this regard. In turn, the Constitutional Court should be handing down a judgment on this matter in the coming months, taking into account the different requests from various Spanish courts for a ruling on unconstitutionality.

Due to the obvious implications of this issue for the real estate sector and for the local Spanish tax system, this matter is being monitored closely as time draws closer to a verdict by the Constitutional Court.

The court's decision will be relevant for both the transactions to be carried out in the future and those carried out in the past, for which there is a possibility of contesting the tax (and, consequently, the possibility of recovering the tax already paid) in those cases in which the statute of limitations period has not elapsed.

In any case, it should be noted that the case law has so far required taxpayers to prove the lack of an actual increase in the value of the land (i.e. through an appraisal by an independent third party) in order to obtain a refund of the IIVTNU initially paid (and late-payment interest).

If this majority position being taken by the courts becomes consolidated, it could lead, at some point, to a modification of the legislation regulating the IIVTNU to adapt its definition of the taxable event and the procedure for quantifying the tax payable (something that is clearly necessary in view of the present situation).

Ignacio Guerra (ignacio.guerra@garrigues.com) and Gonzalo Rincon de Pablo (gonzalo.rincon.de.pablo@garrigues.com)
Garrigues Madrid
Website: www.garrigues.com

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