EDITOR’S NOTE: Lawyer Raymundo Larraín Nesbitt explains the recent Constitutional Court ruling that the Plusvalia tax cannot be charged when a vendor sells a Spanish property a loss, and advice for vendors affected by the change.
By Raymundo Larraín Nesbitt
Lawyer – Abogado
Friday 3rd of March 2017
Spain’s Constitutional court in a landmark ruling from last 16th of February declared that ‘Plusvalia’ property tax cannot be charged when a vendor sells property at a loss. In plain English; no profit, no taxation.
After a long property boom that lasted eight years, the 2008 bank meltdown delivered a lethal blow which caused property prices to tailspin overnight. This property implosion drove many vendors to sell properties below what they had actually paid for them during the heyday of the property bubble (Below Market Value or BMV properties).
As a recap, on selling property in Spain a vendor is liable for two taxes (you can read further in my article Taxes on Selling Spanish Property):
- Capital gains tax (paid to regional Authorities).
- ‘Plusvalia’ tax (levied by town halls).
Regarding the first tax, capital gains tax, I had already covered in a detailed article the consequences of receiving a ‘Complementaria’ or Bargain-Hunter tax and how to appeal it successfully.
This blog post will focus, however, on the second tax I list above; the so-called ‘Plusvalia’ tax. On selling, property vendors need to pay this tax as a result of the increase of value in the land to the town hall where the property conveyed is located. If there is no increase in value, it stands to logic no tax should be collected, right? Wrong! Town halls have fought tooth and nail to avoid this as they are overdependent on this local tax. This tax constitutes in most cases their main source of income. Only last year over 140 million euros were collected in Malaga province alone.
The significance of the Constitutional Court’s ruling is that, for the first time ever, it gives the reason to vendors who had complained bitterly over the years that it made no sense to pay taxes on a property they were making a loss on selling. Town halls had turn a blind eye on this new phenomenon and adamantly refused to reimburse vendors the collected tax walking away scot free – until now.
In a nutshell, the reason of the discrepancy is because town halls calculate the ‘Plusvalia’ tax using the rateable value of property (cadastral value) they have on their books. Most town halls have not updated these values in line with today’s market downturn and these, in most cases, still reflect the outdated values fetched at the peak of the property bubble. That is why vendors are still being charged this tax despite making a loss on selling.
It is estimated this ruling affects over 500,000 vendors.
The new ruling confirms similar rulings from regional Supreme Courts across Spain.
Timeframe to Claim
Unfortunately, vendors can only claim back tax dating the last four years as any tax collected before February 2013 is now time-barred. In other words, any vendor who’s sold a property at a loss since February 2013, and has paid ‘Plusvalia’ tax, is now entitled to a full refund. The vast majority of vendors paid on average €1,000 or more in plusvalia tax on selling at a loss.
Selling Property Now
It is a principle in Spanish law that you first have to pay the requested tax (or fine) and then file a complaint (appeal). So, if you are selling property now – at a loss – you cannot refuse to pay the ‘Plusvalia’ tax. Only once you pay it can you then raise a complaint seeking a full refund.
The New Ruling Spells Trouble for Town Halls
It is no secret town halls in the wake of the property bubble struggle to make ends meet as tax revenues have taken their toll due to the low volume in property transactions. The new ruling poses a serious setback to council finances which in most cases will translate into significantly denting their coffers and in others will throw local finances into disarray. Vendors can reasonably expect serious delays in paybacks if vendors start appealing en masse for a tax refund.
How to Claim
The process is not straightforward and is somewhat convoluted (always the red tape!). It requires the input of professionals. It does not suffice to show the difference between the buying and selling price in the Title deeds as it will be turned down by the Administration. You need to appoint a competent law firm to act on your behalf to claw back this tax. To appeal the tax successfully a technical report must be commanded to back the legal recourse.
As written, for most people this tax will be in the hundreds of euros yet in other cases the amounts can be quite substantial warranting the support of a law firm.
Only a case-by-case approach can discern on whether it is worthwhile or not for a client to file a complaint employing lawyers.
Larraín Nesbitt Lawyers, small on fees, big on service.
Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at email@example.com, by telephone on 951 894 675 or by completing our contact form.
Legal services Larraín Nesbitt Lawyers can offer you
- Buying Distressed Property in Spain – 8th August 2011
- Buying Resale Property in Spain – 21st February 2013
- Title Deed Explained – 8th April 2013
- Nota Simple Explained – 8th April 2013
- Buying Off-Plan Property in Spain – 8th of June 2013
- Investor Guide to Spain’s Golden Visa Law – 8th November 2013
- Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
- How to Buy Commercial Property in Spain – 4th July 2014
- How to Buy Rural Property in Spain – 8th August 2014
- How to Buy Property in Spain Safely – 10th October 2014
- Taxes on Selling Spanish Property – 8th December 2014
- ‘La Complementaria’ or Bargain-Hunter Tax – 8th May 2015
- House Hunting in Spain – 17th June 2015. The New York Times
- Non-Resident Taxes in Spain – 8th December 2015
- Snagging List Explained – 28th October 2016
- Energy Performance Certificate Explained – 7th November 2016
- Selling Property in Spain – 10 Reasons to Hire a Lawyer – 8th December 2016
- Buying Property in Spain from a Private Seller (Resale Property) – 21st of February 2017
- Buying Property in Spain from a Developer (Off-Plan Property) – 8th March 2017
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