Current situation on the plusvalia tax in the Spanish conveyancing system
The subject of the plusvalía tax in Spain is a very complex and delicate issue from a legal point of view. Below, I have tried to give a simplified summary of the current situation and what you should do if this affects you in any way.
The plusvalía tax is a local tax that is paid to the local town hall when urban land is sold. Its correct name is Urban Land Increase of Value Tax and it is basically a tax on the increase of the land value since the last change of ownership. If, for example, you sell an apartment, part of the sale value is a proportion of the urban land on which the block of apartments is located. The way to calculate the increase of the land value, according to the law, is basically by applying a percentage to the current “Catastro” (tax registry) value and then applying the tax rate. That percentage is found by multiplying a coefficient by the total number of years you have owned the property before you sell it. And, according to the law, this is the only way that this tax can be calculated. Thus, it is clear to see that according to the law there will always be an increase of value and therefore a tax to pay even if this is actually not the case. This is because the calculation is based on the “Catastro” value at the time of the sale multiplied by the relevant percentage and then applying the tax rate later on. So, by using this method, the real increase or decrease of the land value is not taken into account at all. According to the law there will always be an increase. It states that the simple fact of owning a plot of urban land for a number of years (more than one and up to a maximum of twenty) is enough to imply that the owners will always benefit from an increase in value.
With the real-estate crisis, which started around the end of 2007, many properties were sold for a lot less than they were originally purchased. This totally highlighted the injustice of the plusvalía tax. It is obvious that if you sell any urban land for less than what you paid for it, you will lose money. However, the law on the plusvalía tax said the opposite as it implied that there would always be an increase.
As the unfairness of the tax became so obvious, the issue finally reached the
Spanish Constitutional Court, which then had to decide on whether the tax was fair or not. It subsequently decided that it was not just and made a number of clauses contained within the law null and void. In concrete, the method used to calculate the plusvalía tax, but only in cases where the tax was liable to be paid when the land value had not increased. The clause stating that the eventual payer of this tax was never allowed to produce any proof or evidence showing the real increase or decrease in the value of the urban land sold was also declared null and void. The reasons these clauses were made null and void was because they infringe the constitutional economic capacity principle that all taxes have to respect.
Nevertheless, this ruling caused a lot of confusion about its scope and how to apply it. So, from this point, some courts decided to make every single plusvalía tax liquidation null and void regardless of whether or not there actually was an increase in the value of the land as their understanding was that the tax calculation method had been made null and void completely. Yet, on the other hand, other courts understood that the town halls were able to liquidate the tax when the land value had in fact increased (which according to the law is always) and, therefore, the taxpayer has to prove if this was not the case.
As there was no clear agreement, the Spanish Supreme Court was asked to clarify the situation. And it did. It then declared that the correct version is the one that says town halls can charge the plusvalía tax when there is real increase in the value of the land. But, as the law will always expect an increase in the land value due to its calculation formula, then it is up to the taxpayer to show evidence that in that specific case the land did not increase in value. When the vendor sells his property for less than what he purchased it for, it is obvious in the difference in purchase and sale prices that there has been no increase. Despite this, the safest way to prove that there was no increase to the value of the land is by via a technical report.
Not at all. The Spanish Supreme Court is still yet to decide on another key issue regarding this tax, namely the legality of the calculation formula to find out the increase of the value. So, we are now waiting anxiously for the court’s verdict. If the Spanish Supreme Court rules that the calculation method is illegal, then all the tax liquidations will be null and void. Every single one of them. And that would very good news for taxpayers but a real mess for the town halls.
For me, that would depend on the amount of tax you are asked to pay. In the case that the land value has not increased, you can challenge the town hall. If the purchase price was higher than the sale price, it will be easy to present evidence proving this. But, even in this case, the town hall may still try to argue and therefore, a technical report will be necessary, and this will result in further technical and legal costs. This is the reason that I suggest that your action should be based on the amount figured in the tax bill, as in the long run it might be worth just paying it.
As you can see from the complexity of this matter and the issues that have ensued, it is especially advisable with this subject to seek the professional advice of an independent lawyer to make the best decision.
Thank you for your time and attention and I hope this information is of use. You are very welcome to share if you liked it.
Please, note that this is general information on legal subject and cannot be used as specific advice on legal situations. It is always recommended to seek legal advice for any specific situation you might be involved.