On February 16, 2017, the Constitutional Court issued a resolution declaring to be void and unconstitutional certain provisions of the Provincial Law of Guipúzcoa 16/1989, which regulates the Tax on the Increase in Value of Urban Land (the "Tax "), but only in those cases in which inexpressive situations of economic capacity are subject to taxation.

The Court Decision recalls the doctrine of the Constitutional Court on the principle of economic capacity of Article 31.1 of the Spanish Constitution and reiterates that "in no case the legislator shall establish a tax taking into account acts or facts that are not an example of the real or potential wealth". In this sense, it states that "the legislator will not be able to create taxes that affect to those cases in which the economic capacity taxed by the tax is potential and non-existent, virtual or fictitious."

The impact of this court decision has been very high, although the scope of its effects has yet to be defined. The Constitutional Court urges the legislator to carry out the pertinent modifications or adaptations to the legal regime of the Tax that allow to arbitrate the way of not taxing the situations of non-existence of increase of value of the lands of urban nature.

In this line, the President of the Spanish Federation of Municipalities and Provinces, Abel Caballero, met on March the 1st with the Minister of Finance and Public Service to discuss the present case. Abel Caballero highlighted that "we will be on the side of citizens" and that "the tax is constitutional, even if its calculation formula is not, as it is created on the erroneous premise that the value of land increases and not decreases." He also added that "we offer our full cooperation, and we want the Government and the Legislative authority to tell us as soon as possible how are they going to solve it, because the court decision, which only affects Guipúzcoa at this moment, will soon be mandatory throughout the Spanish territory ".

Finally, it should be pointed out that it is not expressly inferred from the content of the court decision that the legislative change has retroactive effect. The court decision establishes a nullity "ex nunc", id est, from February 17, 2017 onwards. Even so, we are waiting for the legislator's pronouncement on that point.

In conclusion, in the coming months, the legislator shall adapt the tax legislation to the constitutional decision and also specify whether the effects are "ex nunc" or "ex tunc" (retroactive). If they were "ex tunc", sources from the appraisal company Tinsa estimate that up to 550,000 real estate transmissions could benefit from the refund of the Tax unduly liquidated.

For further information, please contact:

Jordi Rius i Perramon
jordi.rius@AndersenTaxLegal.es