The Government approves the municipal capital gains tax reform
The new regulation establishes in general that the taxable base of the municipal capital gains tax will be the result of multiplying the cadastral value of the land at the time of accrual of the tax by the coefficients approved by the local councils according to the period of generation of the increase in value, but offers an alternative method that will allow taxpayers to be taxed according to the actual increase in value obtained in the transaction. As a novelty, transactions in which the holding period of the property has been less than one year will be taxed.
By means of its ruling 182/2021, dated October 26, 2021, the Constitutional Court has declared the unconstitutionality of the formula for determining the taxable base of the Tax on the Increase in Value of Urban Land (municipal capital gains tax). Specifically, the aforementioned ruling declares the unconstitutionality and nullity of articles 107.1, second paragraph, 107.2.a) and 107.4 of the revised text of the Law regulating Local Treasuries (LRHL), approved by Royal Legislative Decree 2/2004, of March 5, 2004.
The ruling also states that it is up to the State legislator to carry out the pertinent modifications or adaptations to the regulation, in order to adapt the tax to the requirements of constitutionality indicated by the Constitutional Court in this and other rulings.
Royal Decree-Law 26/2021, of November 8, published in the Official State Gazette of November 9, 2021, amends the LRHL in order to adapt this law to the aforementioned constitutional jurisprudence.
The new legislation regulates a new system for determining the taxable base and, as a novelty of interest, establishes that transactions in which less than one year elapses between the acquisition and the transfer of the property will also be taxed.
- New system for determining the tax base of the tax
The Royal Decree-Law regulates a double system for the determination of the tax base:
a. Objective estimation
The first method is similar to the traditional one. Specifically, the tax base will be obtained by multiplying the cadastral value of the land at the time of accrual by the coefficients approved by the city council to which the tax is levied and which will depend on the period of generation of the increase in value. These coefficients may not exceed those indicated below, depending on the number of years elapsed since the acquisition of the property:
In the case of operations carried out in periods of less than one year from the acquisition, the complete months of possession of the property must be computed.
The coefficients will be updated annually by means of a regulation of legal rank, taking into account the evolution of the real estate market. If after such update the coefficients of the tax ordinances are higher than the maximums indicated above, the latter will be applied until the excess is corrected in the tax ordinance.
Finally, the possibility is established that the municipalities may agree, for the exclusive purpose of determining the taxable base, a reduction of up to 15% of the cadastral value of the land, in order to adapt the amount of the tax to the reality of each municipality.
b. Direct assessment
If, at the request of the taxpayer, it is found that the increase in value, determined by the difference between the values of the land on the dates of transfer and acquisition, is lower than that determined by the objective method, this increase will be taken as the basis. These values may be subject to verification by the municipalities.
For these purposes, the following rules must be applied:
In the case of real estate in which there is both land and construction, the difference between the transfer price and the acquisition price of the land shall be obtained by applying the proportion that the cadastral value of the land represents over the total cadastral value.
The transfer or acquisition value will be the higher of the value stated in the title documenting the transaction (or the value declared in the Inheritance and Gift Tax in the case of lucrative transfers) or the value verified, as the case may be, by the Tax Administration.
Expenses or taxes levied on such acquisition or transfer operations may not be computed in this calculation procedure.
The taxpayer must declare the transfer of the property and provide the deeds documenting the transfer and prior acquisition.
- New rule of non-taxation for cases in which there is no increase in the value of the land.
A new case of non-taxation is introduced for those operations in which the taxpayer proves that there has been no increase in value. For this purpose, the interested parties must declare the transfer, as well as provide the deeds documenting the transfer and acquisition.
The calculation of the real increase in value obtained in the transfer will be carried out in accordance with the rules indicated above for the determination of the taxable base of the tax by means of the direct estimation method.
Notwithstanding the application of this rule of non-applicability to a specific transfer, the acquirer will update its holding period for the purposes of determining the municipal capital gain of the following transfer, except in the cases of non-applicability already previously provided for in the tax regulations in which such period was not updated (i.e. contributions of real estate under the tax neutrality regime, operations of contribution and adjudication of assets and rights to the marital partnership or in compliance with judgments of annulment, separation or divorce).
- Entry into force and temporary effects
The new regulation enters into force on the day following its publication, i.e. November 10, 2021.
The municipalities that have established the municipal capital gains tax must adapt their legal framework to the provisions of the Royal Decree-Law within 6 months. Until the municipal ordinances are adapted, the legal framework set forth in the new Royal Decree-Law will be applicable, taking the new maximum coefficients established therein for the determination of the taxable base of the tax.