Recently the law firm Manubens Abogados, while conducting a case in court by Inés Berriozabal, senior tax lawyer in the firm, has obtained the first judgment in Spain upholding  the appeal against of the City Tax on the Increase in the Value of Urban Land in case of a property transfer with capital gains for the seller.

The importance of the ruling lies in the fact that it opens the doors to appeal the real estate transfer tax in all cases: either in case of loss or gain.

For a better understanding of the importance of this judgment, please find below a brief explanation of the background:

The judgment of the Constitutional Court of May 11, 2017, upheld the unconstitutionality case 4864/2016 raised against certain regulatory articles of the City Tax on the Increase in the Value of Urban Land. Basically, the Constitutional Court declared contrary to the principle of economic capacity the fact of taxing an increase in value provided that said increase was not real and effective, since the objective method for quantifying the tax did not allow the possibility of a decrease in a property transfer.

But the ruling annulled several articles "only to the extent that those articles subject to taxation situations of non-existence of increases in value". Therefore, the inevitable question was: When is there an increase in value?

The Constitutional Court answered that it was not enough to refer the case to an expert, but the determination of the existence of such increase in value was up to "the legislators who, making use of their freedom to configure regulations, [...] must carry out the relevant modifications or adaptations." And obviously, this should be done in accordance with the principle of economic capacity breached by the annulled articles mentioned above.

This adaptation, which has already been done at regional level, surprisingly, almost 9 months after the judgment, has not yet been done at state level. And we say “surprisingly” because for years (at least from 2012), case-law and jurisprudence have questioned the validity of a tax on capital gains that have not occurred. Therefore, the ruling of the Constitutional Court cannot be considered to be an unexpected surprise.

Considering the above, let’s analyze the current legal situation of the property transfers appealed.

The most recent judgments of the courts, waiting for a new regulation to enter into force, are essentially following two paths:

• On the one hand, some Courts are considering that the existence of an increase is a question of fact that can be assessed by the judge. Therefore, the tax paid in the cases where the judge considers that no capital gain has resulted, will be cancelled (Judgment of the High Court of Justice of Madrid 512/2017).
• On the other hand, other Courts are considering that since the judge is not responsible for determining the existence or not of an increase in value, in the absence of a rule that defines it, the tax is not to be paid (Judgment of the High Court of Justice of Catalonia 787/2017). This would apply to all property transfers, in theory, even if there is an apparent increase in value. And this is the context of the judgment of Court No. 2 of Barcelona of November 27, 2017 to the case conducted by Manubens Abogados that annuls the tax despite the capital gain obtained.

The Court analyzed all the possibilities offered by the current regulations and assesses  the various options for action such as:

1. ruling according to the result of an expert evidence;
2. ruling according to the values ​​set by the acquiring and transferring parties;
3. applying an objective criterion, similar to the one determined by the regional regulations already in force;
4. suspending the procedure.

The first three options are not valid since according to the Constitutional Court resolution, the task corresponds to the legislator and not to the judge; in addition, such action would go against the constitutional principle of legal security and “reserve de ley” (that is, all matters specifically and exclusively transferred by the Constitution to legislators) in tax matters. The fourth option is not applicable either since it is not considered as a cause for suspension of a judicial proceeding, neither in the Contentious Administrative Jurisdiction Law nor according to the Civil Procedure Law. The conclusion leads to the annulment of the City Taxes on the Increase in the Value of Urban Land appealed.

The conclusion is obvious: the current line of action set by the abovementioned ruling will always uphold the appeal against of the City Tax on the Increase in the Value of Urban Land provided that it is possible from a procedural point of view and regardless of whether the result of the property transfer is a gain or a loss.