On 9 July 2018, Supreme Court Ruling STS 1163/2018, dated 9 July 2018, was published, in which the scope of the declaration of unconstitutionality of the Constitutional Court ruling (TC) 59/2017 is analysed and interpreted, concluding that the Municipal Tax on Capital Gains on Urban Land, or Municipal Capital Gains Tax (IIVTNU in Spanish), is fully constitutional and payable unless the taxpayer can prove that there is no increase in the value of the urban land.
The Constitutional Court (STC 59/2017, dated 11 May 2017) issued a sentence in May 2017, declaring Clauses 107.1, 107.2 a) and 110.4 of the Local Inland Revenue Law (TRLHL in Spanish) to be unconstitutional and null and void in cases where the value of the land has not increased on the transfer thereof.
The Supreme Court has now issued a ruling, thereby clarifying the confusion created by the Constitutional Court’s ruling which generated a massive wave of applications for the return of undue payments, even in cases when the value of the property had clearly increased.
It thus interprets Clauses 107.1 and 107.2 a) of the TRLHL to be only partially unconstitutional and partially null and void; therefore, they are constitutional and fully applicable, and consequently, payment thereof is due “in all those cases in which the taxpayer has not been able to prove (…) that the transfer of ownership of the land by any title (or the constitution or transfer of any real right of enjoyment, limiting ownership, over the land in question) has not led to an increase in its value, or in other words, an economic capacity susceptible of being taxed under clause 31.1 EC”.
Moreover, it considers that Clause 110(4) of the TRLHL is, however, unconstitutional and null and void in all cases (total unconstitutionality) because, as stated in STC 59/2017, “it does not allow for a different result other than that which results from the application of the valuation rules it contains in itself”, that is to say, because “it prevents taxpayers from being able to prove the existence of an undemonstrative situation of economic capacity”.
This therefore makes it possible for the taxpayer to prove by any means (public deeds, expert evidence, etc.), even for index purposes, that the value has not increased, and the Authorities are ultimately obliged, if they do not agree, to prove that the land transferred has in fact increased in value.
In conclusion, only in those cases in which the taxpayer can prove by any means that the transfer generated a loss or that there was no increase in the value of the land, can he claim for a refund of undue payment, closing the door to the rectification of IIVTNU self-assessment and, therefore, to the refund of the payment made in those cases in which this circumstance is not proven. It will be the taxpayer who will have to prove it by any means possible, and the burden of providing proof against this will be the Authorities’ responsibility.
With respect to transfers subsequent to the Supreme Court ruling, in practice, most local councils have established that the municipal capital gains tax is formalized by self-assessment (settlement initiated by the taxpayer himself), so following a prudent criteria and awaiting an amendment to the Law Regulating Local Taxation which will clarify the procedure to be followed, it should be the taxpayer himself who declares the transfer operation, stating that it is not subject to this tax (since there is no increase between the acquisition and transfer value in the taxable event), and so it should then be the Authorities which have the burden of proof. Taxpayers must provide a principle of proof that there is no increase in value (e.g. deeds). However, this will not always mean that they do not have to pay the tax, since the Authorities could then show the existence of an increase in value by means of a technical report, which would make the proof from the deeds insufficient, thereby forcing the taxpayer to appeal by providing favourable expert evidence.
Notwithstanding the foregoing, it should be noted that the mathematical formula used by local councils to calculate the tax is currently being questioned, and that the Supreme Court itself will have to pronounce a ruling for an appeal in which it is stated that the formula currently used is not correct because it calculates the increase that the land would have in successive years but not in the years in which the property had been in the possession of the taxpayer. A favourable resolution to this appeal could lead to a large number of claims by taxpayers who, in cases of increased land value, paid an excessive tax because of an error in the basic definition of the tax.