It is curious that among the posts on our blog, our professional lawyers specialized in Real Estate Law in Spain have never analyzed on any occasion, or just did it superficially, the municipal Plusvalia tax in Spain.
So in this blog we are going to give a few insights to the pompous “Tax on the increase in the value of the land of an urban nature”, or better known in Spain as the ”plusvalia tax”.
By Welex, your lawyer specialized in Real Estate Law in Spain.
Who manages and collects the Plusvalia tax in Spain?
This tax is assigned to the Town Halls in Spain, therefore it is a municipal tax.
What law regulates Plusvalia tax in Spain?
The Spanish Law on Local Finance is the regulation for this tax and its Article 104 describes it as a direct tax on the increase in value of the land of an urban nature, which is evidenced as a result of the transfer of ownership of this land by any title or the constitution or transfer of any right in rem of enjoyment, limiting the ownership of such land.
Therefore, the land of a rural nature will not be subject to this tax in Spain. Nor does it tax buildings on such land.
The municipal Plusvalia tax in Spain will be levied on the increase in the value of such land from the date of its acquisition to the date of its transfer, either by way of a burdensome title, such as a purchase or sale, or by way of a lucrative title, in the case of a donation or the adjudication of an inheritance.
Who has to pay the Plusvalia tax in Spain?
In the case of transfer of land for a valuable title, for example a sale, the seller would have to pay this tax in Spain.
Be careful, in case of a sale between non-residents, the buyer would also be obliged to pay, in case the non-resident seller does not assume the obligation to pay.
In these cases, the situations are resolved between the lawyers of both parties, making retention of the purchase price for the estimation of the Plusvalia tax in Spain explaining it in the deed of the sale in Spain.
In cases of transfer for free (or profit), as for example in cases of donation of land or by the adjudication of an inheritance, the person who acquires the land would be the one obliged to pay the tax.
When is Plusvalia tax due in Spain?
We will distinguish here the date of the accrual from the date of the presentation of the declaration of this tax in Spain.
The date of the accrual of the tax would be, regarding inter vivos transactions, at the moment when the transfer takes place. In most cases, this date is determined by the date on which the deed is signed (purchase, sale, donation, etc.). Thus, the deadline for filing the declaration is 30 working days from that date.
In cases of the transfer due to death (awarding of land by inheritance or legacy), the date of accrual occurs at the time of death of the deceased and not from the date of signing the Deed of Granting of Inheritance. Care must be taken with this point.
Deadlines for the presentation of Plusvalia tax in Spain
Likewise, the period for presenting the declaration of Plusvalia tax in Spain would be 6 months, from the date of the death of the deceased. Normally, these 6 months are exhausted, without even having been granted acceptance of the inheritance. The law provides for the possibility of extending the 6 months to one year, at the request of the taxpayer (the person liable to pay).
There are cases of exemption from the payment of Plusvalia tax in Spain, which at this time, are not the subject of this entry, except in cases of loss of property, which will be discussed in this blog, later.
Before, we’ll try to explain how the Capital Gains Tax is calculated.
How is Plusvalía tax in Spain?
To calculate the Plusvalia tax in Spain we have to take into account the increase in the value of the land over a maximum period of 20 years and the percentage applicable to this increase, as well as the tax rate (the percentage) approved by each local council, which cannot exceed 30%.
The value of the land will be determined in most cases by the cadastral value of the property and that we can find in the Property Tax.
The percentage of the land increase will be calculated by multiplying the number of full years since the last transfer by a coefficient established by each municipality. One clarification: the fact that we are talking about “whole” years indicates that if the transfer of the land takes place within the year of its acquisition, the Plusvalia tax in Spain would not accrue (i.e. if we sell the property within the first year from the purchase, we will not have to pay Plusvalia tax in Spain). Let’s continue.
We said that an annual percentage established by each municipality will be applied to the value of the land at the time of accrual, but that the Law Regulating Local Taxing establishes the following limits:
a) Period of one to five years: 3.7%.
b) Period of up to 10 years: 3.5%.
c) A period of up to 15 years: 3.2%.
d) A period of up to 20 years: 3%.
These percentages, in their entirety, are not based on a real situation, but on supposed precepts established by law. Let us take an example:
Let’s imagine we’re going to sell a villa, with a cadastral value of the land of 150,000.00 euros. The villa has been ours for the last 18 years. The villa is located in a municipality that establishes that the value of the land will increase by 3% per year. So the increase of this land would be the following:
3% x 18 years x 150,000.00 euros = 81,000.00 euros, this is the estimation of this Town Hall that the value of the land of our villa has increased.
Well, this town hall applies the maximum tax rate established by law (30%), for the calculation of the capital gain, that is to say, the capital gain tax would be 81,000 x 30% = 24,300.00 euros. Dear reader, if you have a villa that you bought 18 years ago, you may find yourself in an unpleasant situation with Plusvalia tax in Spain.
Plusvalia tax in Spain: Opinion of Welex, Lawyers specialized on real estate law in Spain
In our humble opinion, the Plusvalia tax in Spain is an onerous tax, out of date and far from the tax principles of generality, progressiveness, fair distribution of the tax burden and non-confiscatory nature.
What does the Constitutional Court say about Plusvalia tax in Spain?
Faced with this manifest tax injustice in Spain, the Constitutional Court in its ruling of May 11, 2017 came to declare the partial invalidity of certain articles of the Law Regulating Local Treasuries, but only in those cases where there is no increase in value.
What the Constitutional Court in Spain did not resolve was the cases in which there is no increase in value. In that ruling, the Constitutional Court told us that it is the legislator who must carry out legislative and tax modifications so that situations of “no increase in the value of urban land” are not subject to taxation.
Practical case of Plusvalia tax in Spain
Imagine that you bought an apartment in Spain in 2000 for 300,000.00 and were forced to sell it in 2009 (economic crisis) for 180,000.00 euros. This is a clear assumption of “no increase in the value of the land”. However, the Constitutional Court in Spain did not value cases in which there was a small gain in the value of the land, but less than the values applicable by each municipality.
In 2017, the Constitutional Court in Spain laid down the foundations for adjusting the capital gains tax, within the requirements of the constitution. However, until the date of this blog, the legislator has not promoted any amendment to the law, which covers this ruling of the CC.
To make matters worse, another ruling of the same Spanish Court, dated October 31, 2019, came to resolve a question of constitutionality, which questioned that even if there were capital gains in Spain, the tax to be paid by the capital gain could not exceed the increase obtained. An example would be the sale of my property in which I obtain a capital gain of 6,000.00 euros but a Plusvalía tax due in Spain of 6,500.00 euros. The Plusvalia tax in Spain to be paid would be greater than the profit obtained from the sale of my property, being a clearly confiscatory case and against the guidelines of our Constitution.
In view of this situation of clear legal uncertainty, the professionals at Welex, lawyers and economists in Spain, advise our readers to review each transaction where Plusvalia tax in Spain comes into play, on an individual basis, in consultation with the corresponding local council, in case they are adopting any specific measure in view of these clearly confiscatory cases. Sometimes, and depending on the local council, it is preferable to pay the tax and then claim a refund, and in other cases, it is sufficient to present a document stating that there is no increase in value or that the capital gain obtained from the transfer of the property is less than the tax liability.
Do not hesitate contact our specialists in order to clear all your doubts about Real Estate Law in Spain.
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