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May 26, 2017

The Constitutional Court of Spain has cancelled the municipal surtax

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The Spanish Constitutional Court determined on the abolition of the payment of the municipal tax on increase of urban land value (IIVTNU), if the sale of a real estate object had caused losses for the seller. Therefore, no obligation arises to pay this tax, as it was until now.

In February last year, the Supreme Court has already issued a similar decision in the case of the payment of rental property taxes, particularly in the Basque Country, but this time we are talking about the decision that will be valid and applicable in all Spanish territory. Therefore, this decision, made public this week, involves making changes to the legislation in force in Spain.

The Spanish government was waiting for a similar decision and that is why it is already working on possible changes. This reform will, in any case, be coordinated with all municipalities of the autonomous regions of Spain. To promote the development of the tax reform, the Ministry of Finance and Public Administration is currently waiting for the report of the Spanish Federation of Municipalities and Provinces (FEMP) on these issues.

For governments at the municipal level, the imposition of such a decision is a remarkable blow, because during the crisis and the recovery of the real estate market in Spain the collection of this tax was one of the guaranteed income sources. According to consulting firms, in 2015, for example, the Spanish municipalities collected 2,625 million euros in the concept of this tax on increase in the value of urban land (IIVTNU).

This tax is calculated on the benefits of the increase in the value of urban land for a maximum period of 20 years after the sale of urban properties in Spain. For this, the cadastral value of the property is taken as reference to which is applied a formula based on the number of years during which it was in the property.

But precisely because of this circumstance, that this tax is calculated on the basis of the cadastral value, which is always rising, the sellers in any case have to pay it, regardless of whether the land or buildings lost their market value or not.

In Spain, meanwhile, during the crisis, urban lands and buildings have lost their value in the market, but their cadastral value was not affected to the same extent.

However, it must be taken into account that this tax is not completely canceled, since only the cases of its application have been changed. As it was reminded by the Spanish Government this week in its official report, the Supreme Court did not question the existence of this tax or the method of calculation on which it is based. That means that if in case of selling a real estate in Spain a profit is really produced, the seller has the obligation to pay it.

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