Spain’s Constitutional Court rules ‘Plusvalia’ tax is illegal if property is sold at a loss

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):

  1. Capital gains tax (paid to regional Authorities).
  2. ‘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.

Legal services Larraín Nesbitt Lawyers can offer you

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About Raymundo Larraín Nesbitt

After completing his dual law degree in Madrid (ICADE) in 2003 Raymundo went on to work for prestigious Spanish and English law firms in Spain before moving to the UK for several years to work for a British multinational. He is a prolific writer of legal & financial articles in English, with well over 140 articles published and widely used in the Spanish real estate sector. Raymundo now runs his own law practice in Marbella, where he advises local and foreign clients on all legal matters with a focus on conveyancing and non-resident taxation. He is regularly quoted by the international press as a reliable source in his field of expertise.

5 thoughts on “Spain’s Constitutional Court rules ‘Plusvalia’ tax is illegal if property is sold at a loss”

  1. Profile photo of Chris NationChris Nation

    This is incredible! Sellers are obliged to pay an illegal tax and then claim for a refund?! In most jurisdictions, someone or some entity which contravenes the law is charged with an offence. If convicted, they are subject to punitive measures, legal costs and frequently, required to pay compensation. It seems that the citizen in Spain is not under the protection of the laws of the land.

    What’s the point of the trials of these people for corruption – the Gurtle case et al – if public bodies are allowed to demand money for a tax that has been deemed illegal? Is that not institutionalised corruption?

    The governance of Spain continues to bewilder me – and disappoint me.

    In one of Mark’s pieces I recall him noting that the Spanish legal system is fair and trustworthy, though impossibly slow. Turns out that the fair and trustworthy aspect is not the case.

  2. Profile photo of Chris NationChris Nation

    A further point: it always struck me as daft that local taxes depended here on property sales. No sales-no tax revenue. It would not take a couple of auditors a week to work out that better cash flow would result in lower purchase taxes – encouraging sales and discouraging under-declarations – and higher IBI. It seems so obvious to me that I can only think that the people who decide these things are either stupid or getting some sort of slice from the present system.

  3. Profile photo of Raymundo Larraín NesbittRaymundo Larraín Nesbitt Post Author

    Hello,

    Just to clarify, the ‘plusvalia’ tax is not illegal, as you mistakenly point out in your comments. This tax will continue to be collected as normal by all town halls, the ruling does not change this fact in the least.

    What the ruling made clear, and this is the novelty, is that unless there has been a profit, no tax should be collected. Collecting tax when no proft is made breaches art 31 of Spain’s Constitution. So as a recap, the tax itself is perfectly legal and will continue to be enforced across Spain.

    Hope that clarifies somewhat.

    Regards

  4. Profile photo of MarkDavidMarkDavid

    We purchased our house, which is our main residence, in Spain in 2001, and are now looking to sell it. Is there any formula we can use to calculate in advance what our our Plusvalia liability is going to be? Hopefully we will make a profit on the sale.

    1. Profile photo of Raymundo Larraín NesbittRaymundo Larraín Nesbitt Post Author

      Morning Mark,

      No, there is not. The reason is beacause town halls have competency over this tax and it varies from one town hall to the next.

      Your appointed lawyer however can request an estimation from your town hall.

      I would be very surprised if you don’t make a healthy profit on a property bought in 2001.

      Regards

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