The decision of the Constitutional Court (TC) to repeal the capital gain tax calculation system de facto supposes the cancellation of this tax, one of the main sources of financing for city councils in Spain (4.97% of municipal income does not financial and around 11% of the direct taxes of the municipalities, according to 2018 figures, the latest aggregate data available). It is the third sentence of the TC contrary to this tribute since 2017, and even so the ruling has arrived before the Treasury has finished a new tax regulation. It is not surprising, then, that the ruling has plunged the municipalities into confusion and concern about the viability of their accounts, and that, in addition, there is a risk that both councils and citizens find themselves in a situation of legal uncertainty.
The core of the legal debate is the fact that capital gains, a tax designed to tax the revaluation of properties when they are sold, ends up being applied automatically even if there is no such revaluation.. In 2017, the TC ruled that the tax should not be paid if no benefit had been obtained from the sale of the home; In 2019, the judges declared the payment of the tax unconstitutional when the rate was set for an amount greater than the increase that had actually occurred. And, now, the TC has decreed unconstitutional and, therefore, null, three precepts of article 107 of the consolidated text of the law regulating local finances because they establish a way of calculating the taxable base of the tax that determines that there has always been an increase in the value of the land although in reality it has not been so. The cause is the complex mechanism to determine the capital gain, which includes the cadastral value, a temporary coefficient and a theoretical discretionary revaluation of each municipality.
It is not usually a good idea to legislate with your back to reality. In this case, it is reasonable to criticize that the calculation mechanism of the tax base does not take into account the evolution of the market over time or the real estate reality of the moment. It is difficult for the citizen to understand that he must pay a tax for a capital gain that has not actually occurred. In the absence of reading the judgment of the TC in its entirety, the court has been consistent in its criticism of this tax in recent years.
For this reason, it is difficult to understand that at this time the Treasury has not developed a new rule for the correct application of a tax that is essential for municipalities and the economy of citizens. The impact of the sentence on the consistories, some of which are under-financed, is harsh, and puts the budget balance of many of them at risk. The ruling also shows the excessive dependence of the municipal coffers on the rates linked to real estate, which has traditionally been a fertilizer for excesses and bubbles in the real estate market.
As requested by the Spanish Federation of Municipalities and Provinces (FEMP), The Treasury should be required to reformulate the rule as soon as possible with the speed that it has not shown in this matter as soon as possible to adapt it to the TC doctrine without causing damage to local budgets – on which so many essential services for citizens depend. – nor legal uncertainty for municipalities. But beyond this situation, the correct financing of the municipalities is still a pending issue.