Municipal Capital Gains Tax on the sale of a property at a loss

UPDATEOn 26 October 2021, the Constitutional Court has anticipated by means of press release its forthcoming ruling annulling the articles that determine the way in which the capital gains tax is calculated. This means, de facto, the annulment of any IIVTNU (municipal capital gains tax) settlement that is not final.

For this reason, on 8 November 2021, the Council of Ministers approved a Royal Decree-Law adapting the tax to the TC's pronouncements. At this publication we explain how this new way of determining the municipal capital gains tax is regulated.

The municipal tax on the Increase in Value of Urban Land (IIVTNU), commonly known as the Municipal capital gains, has in recent years been the subject of various case law pronouncements by the Supreme Court and the Constitutional Court which have limited the way in which the tax is accrued and calculated in the case of a sale of a property at a loss.

Background

The municipal capital gains tax, regulated in the Consolidated Text of the Law regulating local finances, approved by Royal Legislative Decree 2/2004, of 5 March (TRLHL), is levied on the taxable event that occurs with the increase in value of urban land and which becomes apparent as a result of the transfer of ownership of the land by any title, the taxable person being the person transferring (normally the seller) the land.

However, the method of calculating the amount The tax payable is an arithmetic formula that takes into consideration the cadastral value of the land and the number of years of ownership, without being limited or related to the actual capital gain of the transferring party.

Municipal capital gains tax declared partially unconstitutional

For this reason, an appeal of unconstitutionality was lodged with the Constitutional Court, which on 11 May 2017, in its Judgment 59/2017 determined that articles 107.1, 107.2 a) and 110.4 of the TRLHL, were unconstitutional for violating the principle of economic capacity enshrined in Article 31 of the Spanish Constitution.

Specifically, it found that ".that articles 107.1, 107.2 a) and 110.4, all of them of the revised text of the Law regulating local finances, approved by Royal Legislative Decree 2/2004, of 5 March, are unconstitutional and void, but only to the extent that they subject to taxation situations where there is no increase in value".

Subsequently, the Supreme Courtin its Judgment number 163/2018 concludedThe Commission, in relation to the judgment of the TC, that the nullity of the said articles of the municipal capital gains law was only partialThe Commission has not yet adopted a decision on this matter. the taxpayer could prove that no capital gain had arisen on the transfer of the property.

Therefore, in those cases where capital gains did occur, the above-mentioned provisions remained in force and were therefore fully applicable.

And the High Court added that, according to the distribution of the burden of proof in the General Tax Law, corresponded "the taxpayer is required to prove that there is no increase in the value of the land transferred for valuable consideration"and for such accreditation "the taxable person may offer any prima facie evidence, at least prima facie, from which it can be inferred that"The parties must use any legally admissible means of proof for this purpose.

In such cases, for all practical purposes, it has been accepted as preferred means of proof the acquisition and transfer values as evidenced in the Public deeds of purchase and sale of the land.

However, this judgment did not clarify how the capital gain should be calculated. This created a clear situation of legal uncertainty for taxpayers, as it was not clear whether or not the partial nullity of the regulation was applicable.

Supreme Court rulings on how to calculate capital gains

It is clear that the way in which the taxable person's capital gain is calculated is of paramount importance since it depends on this whether or not it applies the limit established by the Constitutional Court's judgment, and therefore whether or not it applies the limit established by the Court's judgment, and therefore whether or not it applies the limit established by the Constitutional Court's judgment.e whether municipal capital gains tax is payable or not.

Since 2018, the Supreme Court has been issuing rulings on which concepts may or may not be taken into account to calculate this capital gain.

For example, the Supreme Court, in various rulings, has held that the method of calculating capital gain or loss for the purposes of Corporate Income Tax (when the transferor is a company) or Personal Income Tax (when the transferor is an individual) would not be analogous for the purposes of determining whether or not there is a capital gain on the transfer of land and, therefore, whether or not municipal capital gains tax is accrued.

In addition, for example, in Judgment of 12 March 2019The High Court has ruled that the urbanisation costs invested in rustic land to convert it into urban land cannot be added to the purchase value of the land for the purpose of determining the acquisition value of the land.

In the same vein, it has ruled in Judgment of 16 September 2019by concluding that the costs inherent to the purchase and sale of a property (notary's office, registration, taxes paid, etc.) are not to be taken into account. to determine the capital gain, which must be limited exclusively to the difference between the purchase price and the sale price of the property.

However, contrary to this criterion, ehe Constitutional Courtin its Judgment of 31 October 2019, ruled that the costs incurred for the acquisition of the landThe fees paid by the client include taxes, notary and registry fees, professional advice or real estate agency fees, among others, should be taken into account in order to reduce the gain producedThe legal conflict is therefore resolved by applying a calculation similar to that established for the purposes of Corporate Income Tax or Personal Income Tax to determine the capital gain or loss incurred.

On the other hand, it is currently pending judgement the appeal lodged at the end of 2019 on whether it should updating the acquisition value of a property in line with the CPI in order to prove that the land has not experienced a real increase in value with its transfer and thus avoid paying the municipal capital gains tax.

The TC and the SC do limit the amount of municipal capital gains tax payable

In the aforementioned October 2019 ruling of the Constitutional Court, what is most interesting is that it limits the amount of the municipal capital gain to the amount of the gain that has actually occurred at the taxpayer's place of business, In such a way that it considers that the declaration of invalidity of precepts 107.1, 107.2 a ) and 110.4 of the TRLHL would come into play not only when it subjects non-existent wealth to taxation but also when it exhausts the taxable wealth, a situation that would arise if applying the rules for calculating the municipal capital gain would result in an amount greater than the gain that has been generated.

And, recently, in Judgment dated 9 December 2020The Supreme Court has aligned itself with this criterion of the Constitutional Court and has held that The taxpayer's "confiscatory" tax assessment which absorbed the taxpayer's entire profit. In other words, the amount payable as tax on the increase in the value of urban land was equal to or greater than the capital gain obtained by the taxable person on the transfer of the property.

This criterion also opens up the possibility of resorting to other settlements issued by Local Bodies in cases in which it was considered that there was a capital gain because the transfer value of the property was higher than the acquisition value, but in which the amount to be paid for capital gains exceeded the actual capital gain obtained.

Can the taxpayer claim a refund of the overpaid capital gain?

This last pronouncement expressly opens the door to the possibility that taxpayers can apply for a refund of undue income for all those cases in which the capital gain produced at the transferor's premises was less than the municipal capital gain paid.

And, although the method of calculating the potential capital gain is still up in the air, leaving taxpayers in an even more serious situation of legal uncertainty due to the fact that the Supreme Court maintains a doctrine contrary to the Constitutional Court as to how the acquisition value of the land transferred should be calculated, it is no less true that any municipal capital gain settled whose amount has exceeded the difference between the sale value of the land and the purchase value, we would be faced with the possibility of requesting a refund of the said excess; it is no less true that any municipal capital gains tax paid, the amount of which has exceeded the difference between the sale value of the land and the purchase value, would be subject to the possibility of requesting a refund of the said excess, based on the aforementioned Constitutional Court Ruling of 31 October 2019, as well as the recent Supreme Court Ruling of December 2020.

However, due to the complexity of this municipal tax and the fact that the numerous court rulings have not followed the same legal line, we recommend that you take proper advice on how you should apply for a refund of the municipal capital gains tax that has been unduly paid.