Officially, it is called the tax on the Increased Value of Urban Land (IIVTNU), but it is commonly known as the 'plusvalía', or value-added tax. Many lawyers are now starting to consider 'plusvalía' to be the new mortgage floor rate clause, because it is possible that a change in the law could result in 35,000 people in Malaga province alone claiming a refund because they were forced to pay it during the past four years.
'Plusvalía' tax has to be paid when a property is sold or acquired through inheritance or as a gift, because its value will have increased over time. For local councils this, together with another property tax, the IBI, has helped to offset the fall in income during the worst years of the economic crisis. However, town halls are now rather worried, because the Constitutional Court recently decreed that it is unfair to charge this tax when there is no profit from the transaction: for example, if someone sells a property for less than they paid for it they should not have to pay any 'plusvalía'.
Why, then, have councils been charging everybody this tax, whether or not a capital gain was involved? The answer is that the tax is not calculated on the actual value of the property but upon its cadastral or rateable value, to which coefficients are applied, and these increase in accordance with the number of years since the last transaction affecting that property, regardless of real sale price. The result is always the same: tax has to be paid.
The court's decision only referred to one appeal against the application of plusvalía in the Basque Country, but the rules also apply nationwide so it is only a matter of time until it forces the government to modify the Law of Local Taxation. In fact, the possibility of the tax being unconstitutional has already been raised and the Constitutional Court is expected to announce its new, nationwide decision regarding that question soon.
The Spanish finance ministry is already considering how this regulation could be reformulated, but the extent of the reform will depend on the forthcoming court decision because it has not only questioned whether it is constitutional to charge the tax when there has been no profit from the sale, but also in cases where the profit turns out to be less than the amount charged in plusvalía.
Mayors are concerned about this uncertainty because they are aware of the financial impact a reform of the 'plusvalía' could have, not only because councils will no longer receive as much income from a tax which they have been applying to the maximum, paradoxically when the property market has been almost stagnant, but also because they can expect an avalanche of claims from people who during the past four years have sold properties for less than the amount they paid for them.
These fears appear to be more than justified: law firms say they are being inundated with enquiries from people who believe they have been charged unjustly, and the Tinsa valuation agency estimates that 35,000 people in Malaga province and 550,000 nationally could be affected. Martínez-Echevarría Abogados, the legal firm which handled the first case to be won by a taxpayer against a town hall in Malaga province (Fuengirola), has received about 600 enquiries in just one month. Around 100 of them are already planning to take legal action.
It is something that will definitely affect property developers, because during the crisis many were forced to sell residential developments and land very cheaply or hand them over to banks but were charged huge amounts of capital gains tax.
The possible change in the law is so important that the Confederation of Business Owners and the Association of Constructors and Developers of Malaga are organising talks to explain the repercussions of the Constitutional Court decision and how those affected can try to claim their money back.
Is very much money involved? Councils in Malaga province earn approximately 135 million euros a year through value-added tax, but none of them, not even the provincial government's tax collection board (which handles the 'plusvalía' of 78 local authorities and collected 62 million euros in 2016), can say how much of that corresponds to transactions in which the property had lost value. Most town halls and the Ministry of Finance, however, claim that they are not expecting a major drop in income if transactions which do not involve a profit are exempted from payment of this tax.
Right now, the atmosphere at town halls is one of tense expectation. While waiting for an end to the uncertainty, the Spanish Federation of Municipalities and Provinces has asked the Ministry of Finance for clarification about the present situation. The federation's president, Abel Caballero, also wants a meeting with the government to find out how they are thinking of changing the tax. "We (the town halls) obey laws, we don't make decisions; we follow and will continue to follow thegovernment's instructions. It has to be the technicians, lawyers and politicians who decide how to proceed with this added-value tax," he said. He also pointed out that because several law courts have declared this tax to be unfair in the past, the federation has been calling on the government to reform it for years.
Most mayors consulted by this newspaper agree that in its present form the plusvalía is an unfair tax, but say their hands are tied: until there is a change in the law they have no choice but to apply it."
Is that true, though? Or could they act on their own behalf and exempt payment of this tax in cases where no capital gain has arisen? Lawyers say they could not.
"We are talking about a national law, so town halls have to apply it and cannot change it," warns Juan José Hinojosa, professor of Financial and Tax Law at Malaga university. He also says it would not be possible to introduce some type of discount such as those which can be given to some people in inheritance cases, because those do not exist under national-level law.
In this situation, the only thing the mayors could do in response to the growing pressure is to reduce the tax rate which is applied when calculating the payment. In most large towns in the province this is around the legal maximum of 30%. However, this would affect not only cases where there is no profit from the sale but all property transactions, and it would therefore leave a huge hole in the municipal coffers. The other option would be even more drastic: stop charging the tax altogether and make it voluntary, but for obvious reasons no local authority is going to consider that.
The Notarial Council of Andalucía is going a step further and is questioning the existence of this tax. "If someone has already paid for the property and pays their IBI for it every year, adding another tax on top of that seems excessive and inappropriate to me; and in cases where there has been no increase in value it is absolutely unjustifiable and incoherent, because if someone has made no capital gain there is nothing on which to base the tax," says Ramón Blesa, the representative of notaries in the province.
Basically then, at present the town halls have no idea what will happen with the 'plusvalía' tax, or how to deal with the increasing number of legal cases. Do they assume that people are right and refund their money, contravening a law which is still in force and causing an 'avalanche effect'? Or continue to reject appeals and end up in court where, in view of recent events they stand a good chance of losing?
In addition to this dilemma, the councils do not know whether, if the tax is reformed, the government will compensate them for the money they will no longer be receiving, as they did in 2003 when firms with a turnover of less than a million euros were exempted from the Tax on Economic Activity (IAE). They hope that this will be the case, but for the moment nothing is clear and the decision of the court is anxiously awaited.
"I think this is a good time to look at a change to local financing"
"The reform of the IIVTNU could have a considerable impact on the income of town halls"
"This council will put a brake on proceedings to charge people for properties which are sold for less money than the owners paid"
"We are not expecting many claims because it is unusual for properties here to lose value"
"The law should look at exempting properties which are directly inherited with no economic transaction involved"
"The tax is still in force and we will continue to charge it until there is a change in the law, except in cases of bank repossession"