As we all know, the constitutionality of the Tax on the Increase of the Value of Urban Land has been called into question by using different arguments for several years now.

The essential reason on which the discrepancy is based is that as a result of the rules that regulate it, the transfers of real estate are always subject to this tax. This happens because its calculation is based on a surplus value objectively calculated: depending on the number of years of ownership of the property, on a coefficient, and on the cadastral value of the property at the time of sale. As we can see, with these three parameters - which always exist - there is no possibility to avoid this tax; not even when the sale has entailed a real loss for the seller. And the question is: Isn’t it against the principle of economic capacity regulated by our Constitution?

The specific case decided by the Constitutional Court through their ruling published on Friday is a good example: the person who bought a property in 2003 for more than 3 million euros, sold it in 2014 for only € 600,000, and despite the dramatic loss existing, the City Council asked for the payment of the tax on the "hypothetical" increase in land value.

It is obvious that, in recent years, the real estate crisis has made “normal” what previously was considered an exception, such as the sale of a property for a price lower than its purchase price. Therefore, and encouraged by the various judgments admitting that the taxpayers were right, lots of them have filed lawsuits, most pending judgment, in relation to the tax collection by the City Council on the transfers of urban property. Everybody knew that the resolution of many of these lawsuits will depend on the decision of the Constitutional Court on the first unconstitutionality claims filed. The expectation on the first ruling of the Court was therefore really high. Well, we already know it, so, what did the Constitutional Court say?

The mission of the Constitutional Court is to analyze if the objective calculation established by the regulations to calculate the tax (that is, the aforementioned calculation consisting in multiplying the number of years of ownership by the cadastral value and by a certain coefficient) complies with article 31.1 of the Constitution which determines that a tax can only be demanded when there is economic capacity and to the extent of such economic capacity. This article explicitly states that merely virtual or fictitious wealth cannot be taxed.

The Constitutional Court, even if it recognizes that this tax does not tax the transfer (because the transfer is already taxed by the Income Tax) but the potential income resulting from the increase of value of the land as time goes by and that becomes known in the moment of the sale, and even if the it admits the constitutionality of taxing such potential increases in value by means of objective systems rather than by quantifying the effective economic capacity, the Court points out that a distinction must be made between taxing a potential income, which would be constitutional, and taxing a nonexistent or fictitious income - which is unconstitutional.

Therefore, when the taxpayer not only does not have a profit on the sale but obtains a loss, taxing the mere fact of having kept for a certain period of time a property, means taxing a non-existent wealth, which is contrary to Article 31.1 of the Spanish Constitution.

Although the ruling still leaves some unresolved doubts (its total applicability or not to the common regulations since it analyzes a specific case of regional regulations which contains some particularities; its temporary effects; what happens with the cases where a profit was obtained with the sale but lower than the one calculated automatically, etc.) it will undoubtedly lead to countless appeals against all those tax collections of the Tax on the Increase of the Value of Urban Land that were performed in the middle of the crisis – because of its automatic calculation and to avoid problems, costs and surcharges – despite of the fact that most of them were sales of real estate below the purchase price.