In a recent ruling against the City of Cuenca’s suggested formula to calculate municipal taxes or Plusvalia payments on property transactions, Spain’s Supreme Court settled the matter in an interesting manoeuvre.
In September 2010, the City of Cuenca suggested for the first time that a taxpayer could self-liquidate municipal taxes by using a calculation formula different from that provided for in the Law, (article 107 of the Ley de Haciendas Locales – LHL ), whenever justified by a mathematical expert. This judgment was ratified by the High Court of Justice of Castilla-La Mancha in April 2012.
However, the most recent ruling against Cuenca emphasizes the impossibility of applying this calculation formula as it has been done so far, opening the door to claims on settlements already made.
The formula for calculating the municipal capital gains tax has been questioned for years. This is because it is considered that it only takes into account the future increase in land values and not the increases realised since the time of purchase.
The government has always defended the legality of the calculation formula although courts across Spain have progressively stopped using this method of calculation. This led to Cuenca’s City Council filing a cessation appeal requesting that the Supreme Court declare the correct formula be stated as the one provided for in the Law, with no option to use alternative formulas.
In an attempt to nail down the finer points of the calculation formula, Cuenca’s Council pointed out in its appeal that the correct interpretation of Article 107 of the LHL is that the taxable base of Plusvalia is obtained according to the following formula:
Land Value x [(Number of Years) x (% of Increment)]
However, the Supreme Court rejected Cuenca’s request and added its weight to what it considers the only possible interpretation of Article 107, which prevents councils from determining increases in land values and places responsibility for calculating municipal taxes firmly with legislators.
The judgment implies that the formula for calculating Article 107 of the LHL can no longer be applied and stresses the impossibility of applying the calculation formula as it has been done so far. The ruling also implies that neither Town Halls nor the Courts are competent to decide whether or not there has been an increase in land value for tax purposes.
In short, the judgment of the Supreme Court declares the impossibility of applying the formula for calculating the tax, which could pave the way for the annulment of settlements already issued and those that are pending.
In simple terms, the Court ruled that the articles in the regional regulation of the Plusvalia tax were unconstitutional. This is mainly because tax has been applied to increases in property values, without allowing for situations where property may not have had any increase in value or may have even lost value.
In addition 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. Therefore, because the tax is levied on increased values it is not applicable when there is no profit.
The bottom line is that if you have sold property and settled a payment for Plusvalia Tax, you may now be entitled to a refund. If you feel you are eligible to make a claim, we urge you to contact us for advice on how to exercise your right to a refund.