Since May 2017, the requirement to pay the Municipal Capital Gain tax was declared unconstitutional, provided that the case of non-existence of an increase in the value of the property that was the subject of the transfer occurred.
The objection issued by the Constitutional Court (TC) questioned the calculation formula applied. The tax base was defined based on the cadastral value of the land and the number of years of ownership of the property, regardless of the effective value of the land in question.
In July 2018, the Supreme Court expressly pronounced exempting taxpayers who could demonstrate that they have sold their property and had losses from paying this tax.
In 2019, we continue to expect that Congress will advance in the reform of the Local Finance Law. After Congress, it will still have to go through the Senate. In this instance, the Upper House may approve the text as it has been prepared by Congress, as well as introduce amendments or interpose a veto. In the latter case, the action would have to be approved by an absolute majority.
Who can claim the municipal capital gain?
All taxpayers who have made the sale at a loss of property on urban land, and have paid the corresponding municipal capital gains tax, is in a position to claim the amount paid.
What is necessary to claim the capital gain is that the taxpayer can prove the non-existence of earnings and that it is within the legal term to make the rectification or claim. The term is established in the municipal ordinance and will have a priority.
The term to undertake this action will depend on what the Local Treasury of the City Council stipulates. If the municipal ordinance establishes that the taxpayer submits the tax by self-assessment, the Law confers a term of four years from the end of the voluntary filing term. This to rectify it and later appeal it.
If the municipal ordinance that corresponds to it establishes the presentation of the tax by liquidation, the Law grants a period of one month counted from the notification to appeal it. In the case of liquidation, the taxpayer has the option of requesting the nullity of the liquidation.
After these deadlines, the settlement is final and cannot be appealed, only a special review procedure can be initiated.
How to claim capital gains?
The claim for capital gains is made by sending the request in writing to the City Council. This is a request for a refund of improper income.
Under this figure of return of undue payment, you can claim in an expeditious manner, the refund of a tax that:
- It has been paid in duplicate.
- It has been paid for an amount greater than that corresponding to the self-assessment or settlement.
- It has been paid when the term of the tax obligation has already been prescribed.
To claim the return of the municipal capital gain for having transferred at a loss, the return of undue income is usually denied by the City Councils.
In any case, the City Council will respond to the request within a maximum period of 30 days. In the absence of a response, the interested party may go to the Administrative Economic Court of his municipality.
To support the rectification of the tax presented by self-assessment, a written request will be sent. To this request, the deeds of acquisition and transfer of the property must be attached as evidence of the non-existence of economic benefits. Additionally, you must provide proof of payment of the tax, which is proof of the amount to be recovered.
It is advisable to add a technical expert report that shows the devaluation that the property has suffered.
Likewise, to sustain the full nullity of the right or settlement, the taxpayer must submit to the corresponding City Council the written request and the evidence available to him.
Can the City Council deny the claim for capital gains?
Yes. It is the power of the City Council to obtain expert reports that demonstrate that indeed, there is an increase in the value of the land. Doing so may invalidate the claim for capital gains.
It is up to the taxpayer to prove, not before the City Council, but before the Court through an expert technical report, that the loss is real.
Currently, the courts tend to opt-in to these requests in favor of the taxpayer. Of course, according to the credibility of the non-existence of an increase in value. Judgments in favor of the taxpayer, normally, condemn the City Council to refund the amount paid plus late payment interest.
Should the municipal capital gain be paid despite having been declared unconstitutional?
In real estate transfers in which there is no profit, it is important to remember that the declaration of said tax must be filed, informing that there have been losses.
After the declaration is presented, it is the power of the City Council to inform the taxpayer if the liquidation proceeds or not.
Until now, each City Council acts autonomously. While some city councils have stopped liquidating the capital gain, waiting for the legal norm to be approved; Others decide the liquidation in cases where there has been an increase in value.
The case of the Madrid City Council stands out, which continues to pay this tax in all cases. In this municipality, the bulk of taxpayers necessarily choose to pay and then appeal the tax in cases of the non-existence of profit.
In the case of inheritance or donation, can it be claimed that there has been a loss of transmission?
In the cases of acquiring property by inheritance or donation, the regulation obliges whoever receives the property to pay capital gains tax. However, the Supreme Court has been considering that in these cases the transmission can also occur with loss.
This situation would occur when the land had a value at the time it was acquired by the deceased or the donor, and another value at the time of being transmitted by inheritance or donation. It is, therefore, feasible to claim municipal capital gains by inheritance.
In this regard, the legal consideration collides with the fiscal one. And it is that the General Directorate of Taxes considers that in these cases there is no loss because the taxpayer receives an asset that he did not have before.
The proposed reform of the Local Tax Law (pending), allows heirs and donees to prove the loss of value in this type of transfer. This contributing the values declared in the Inheritance and Donations Tax.
What changes does Congress contemplate in the Local Finance Law?
The law proposal contemplates modifying the articles declared void by the Constitutional Law. Establishing that in the cases in which the taxpayer proves, through documentation, the inexistence of the increase in value, they are declared as not subject to the capital gains tax.
It also contemplates that in the cases of acquiring property by inheritance, the reference value of the transfer is taken as the one declared in the Inheritance and Donation Tax.
The proposal maintains the form of calculation that already existed, applying coefficients to the value of the land at the time of transmission to be determined by each City Council, with maximum limits established in the Proposal of Law. These coefficients would be updated annually.
Finally, the proposal contemplates that the periods of ownership of the property are included in years and months. In other words, they count for periods of less than one year.
The action of the taxpayers when claiming the return of the municipal capital gains tax must be done observing the terms of the Law and under the legal figure most appropriate to the case. If you have any kind of query, at Sky Marketing we will be happy to answer it for you. Contact us!