Spanish Constitutional Court Rules Against Plusvalia!
You may have recently heard or read about recent court rulings handed down by various Spanish Courts, including the Constitutional Court, charged with ruling on constitutional issues in Spain.
Several of the regional high courts in Spain have ruled on appeals presented for consideration on the legality of the “plusvalia” tax payment on sale of property when such sale incurred losses. The Constitutional Court has also recently ruled on the “plusvalia” tax.
As a result of these court rulings many owners who sold property at a loss may now be eligible to claim a refund of the payment made.
Statute of limitations is attached and therefore if you sold property within the last few years we urge you to seek advice on your eligibility for a claim.
What is Plusvalia tax?
Not to be confued with Capita Gains tax, Plusvalia is a tax which is levied on the alleged increase in value that the land a property is built upon has experienced between the purchase and the sale dates, and is calculated based on the number of years the property has been owned. However, it is to note that this tax does not take into consideration the real price paid for property, nor actual market value, and instead it is in general calculated by a mathematical formula applied to the value assigned to the land in the public record of the Cadaster.
The Cadaster is one of the various public property records, one which in this case contains basic information on title to property but moreover contains information on the location of property and its value. As such it assigns value to property and this value is used by Town Halls to calculate various taxes, such as the local rates (Impuesto sobre Bienes Inmuebles or IBI), and the Plusvalia Tax. For more detailed on Plusvalia, please click here.
Isn’t that the same as Capital Gains tax?
No. Firstly, Capital Gains tax is calculated and paid to the Spanish State Treasury whilst Plusvalia is caculated and paid to the Local Town Hall.
Secondly, Capital Gains Tax is calculated based on the actual price paid for the property when you bought it and price you sell your property for. If you have made a loss, you pay no Capital Gains tax and depending on your circumstances you may be able to off-set this against your other personal tax liabilities.
Plusvalia on the other hand is based on the Cadaster value, and is payable on the theoretical the increasse in the value of the land and not the total property. As this is an algprythmic caclulation, Plusvalia does not take into account any loss of value and assumes that every sale generates a profit no matter how small!
How is Plusvalia calculates?
The Plusvalia Tax is currently regulated by articles 104 to 110 of Royal Legislative Decree 2/2004 which passed the Regulation of Local Property (“Ley Reguladora de las Haciendas Locales”).
The tax plusvalia tax is levied on the value of property in the Cadaster, and section one of article 107 stipulates that the amount subject to taxation is the increase in value of the property expressed as a factor of the number of years the property has been owned, capped at a maximum of 20 (years), but taking into consideration the value of the property at the date the property is sold (second paragraph of the aforementioned article). Subsection a) of the second section to article 107 establishes that the value to be taken into consideration is the value considered to calculate the local rates (Impuesto sobre Bienes Inmuebles), which is the Cadastral value.
Section 3 of article 107 allows to apply a reduction to the property value when certain criteria are met, and section 4 of the same article, establishes that the resulting amount is subject to a percentage depending on the term owned, which is multiplied by the years that have transpired between purchase and sale. The resulting amount is finally taxed at the corresponding tax rate.
A more in depth analysis of the above brings to light that what is actually taxed is not any increase in value of the land between purchase and sale as at no point is the value of the land at purchase considered and the multipliers and ratios are all applied from the starting point of the value of the land at time of sale of the property only. This was one of the principal reasons for the Court Rulings against the way this tax was calculates as it was deemed to be unfair and unjustifiable.
What is the ruling handed down & what does it mean?
If you have read other articles you now know that there have been Court Sentences handed down with tax implications, or you may have simply heard about the Spanish Constitutional Court handing down a ruling on the “plusvalia” tax, but may not know exactly what this means.
First of all the Constitutional Court is charged with the interpretation of the Spanish Constitution as highest ranking law in Spain, which all other laws and regulations must abide.
In this matter, Administrative Court number 3 in the northern city of San Sebastian in the Basque Country was hearing a case on a “plusvalia” tax payment and had concerns on the regulation of this tax. Consequently the Judge raised a formal query (“Cuestion de Inconstitucionalidad”) to the Constitutional Court to rule on certain articles of the regulation.
It should be noted that the above query was presented to the Constitutional Court on the tax regulation of the Basque Country which has its own special tax regime in certain matters, separate to the general regime of the rest of Spain. Although the Sentence is handed down considering this regional regulation, the articles on “plusvalia” tax are identical to the articles in the nationwide tax regulation.
In simple terms, the Constitutional Court ruled that the articles in the regional regulation of the “plusvalia” tax were unconstitutional only insofar as they regulated the tax as applied to an increase in property value but did not allow for situations where property may not have had any such increase in value or may have actually even lost value, with no option for taxpayers to prove such loss in value.
Although the Constitutional Court declined to issue ruling on the articles in the nationwide regulation of this tax, the wording of the articles in both laws is identical and the Court is expected to rule soon on the nationwide regulation.
In light of the above it can be argued to claim back amounts paid for this tax in consideration of the ruling from the Constitutional Court.
In addition to the above several of the Regional Supreme Courts, including those of Madrid, Catalonia, Valencia, and recently Andalucia, have ruled that lack of profit denotes lack of increase in property value and therefore as the tax is configured as levied on increase in property value the tax is not applicable when there is no profit.
If you sold property, you should have settled a payment for Plusvalia Tax and may now be entitled to a refund. Statute of limitations is attached and therefore if you sold property within the last few years we urge you to contact us for advice on your eligibility for a claim.
About the Author:
Jason Rivero is the Legal Council at Cognisant Associates. Jason is a qualified lawyer with licence to practice in Spain and law degree from University of Malaga. Jason is Principal Partner at Alpha Iuris the legals firm advising Cognisant Associates. He is fluent in Spanish and English, and specialises in Contracts, Conveyancing, and Residency in Spain.
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