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Turmoil in the Spanish real estate sector: Constitutional Court partially annuls a major local property transfer tax

The Spanish Constitutional Court has declared some provisions of the Law governing the Tax on the Increase in Value of Urban Land (TIVUL) unconstitutional. In response, the Spanish government has fast-tracked a new decree law (Royal Decree Law 26/2021 of 10 November 2021) on the new rules governing TIVUL.

The judgment is causing much uncertainty in the market due to the circumstances surrounding its publication, its effects until it is published in the Spanish Official Gazette, and the fact that the new TIVUL rules have been passed in haste.

What is TIVUL?

TIVUL is a municipal tax that is levied on the increase in the value of urban land from the moment it was acquired to when it is transferred. It is an important source of income for Spanish local councils and represents one of the main taxes (transaction costs) for owners who transfer or sell their urban properties. Its amount depends on the cadastral value of the plot on which the property is located, how long the seller has owned the property, and the rules that local councils set in accordance with the Local Treasuries Law (Royal Legislative Decree 2/2004 of 5 March) to determine the TIVUL rate and taxable amount.

Chapter 1: Constitutional Court releases an informative note on the judgment

In an extraordinary sequence of events, on 26 October 2021, the Spanish Constitutional Court published an informative note nullifying the method used to calculate the taxable amount for TIVUL purposes. In short, the Court declared the method unconstitutional because it was based on a presumption that urban land always increases in value, regardless of whether it actually does and by how much.

The informative note also stated that it would only affect tax payments that were not final when the Constitutional Court’s judgment was handed down. Under Spanish tax law, self-assessments are subject to a limitation period of four years (after which they become final) and assessments issued by the tax authorities can only be appealed within one month following the date they are issued, after which they also become final.

The judgment has two precedents (59/2017 and 126/2019), albeit more limited in scope, in which the Court held that TIVUL was not payable when the taxpayer could prove that land had not increased in value or that the increase was equal to or less than the TIVUL due. The new judgment goes a step further by ruling that the provisions setting out the method for calculating the taxable amount are unconstitutional (even in those cases where there was an increase in value) since the method for determining the taxable base infringes the economic capacity principle set out in the Spanish Constitution which establishes, in short, that taxpayers should only pay non-confiscatory taxes on actual capital gains and/or income.

Chapter 2: a draft copy of the judgment is leaked

On 28 October, the draft judgment appeared to have been leaked to the press. The leaked text revealed that the Court considered that all self-assessments that had not been challenged by 26 October (the date on which the Constitutional Court judgment was handed down) were “definite” and “final” (even if not time-barred) and could therefore not be challenged. According to the Basic Law on the Constitutional Court, unconstitutionality rulings are effective from the date on which they are published in the Spanish Official Gazette (Boletin Oficial del Estado). For this reason, some academics have questioned whether the Constitutional Court has the authority to extend the scope of the nullity effect of its judgment to a date before the judgement is published in the Spanish Official Gazette.

Even though the likelihood of success is truly uncertain given the Constitutional Court’s general authority to tailor the effects of its judgments, many in the real estate sector began challenging their TIVUL self-assessments (which were not time-barred) before the judgment was published in the Spanish Official Gazette. On 3 November, the Constitutional Court published its judgment in full on its website, which confirmed what had previously been leaked.

Chapter 3: New TIVUL regulations 

The Constitutional Court also urged the legislator to reform the TIVUL rules and, in response, the government has already passed Royal Legislative Decree 26/2021, which entered into force on 10 November. According to the new rules, TIVUL will not be due if there is no increase in the value of the urban land on which a transferred property is built. It also gives the taxpayer two methods to calculate the taxable amount: an objective method that applies specific coefficients to cadastral values, and an alternative method that is based on the actual increase in the value of the land.

These new rules will not apply retroactively, which leaves transactions carried out in the period between the date from which the old TIVUL calculation rules were nullified and the new rules came into effect in an unprecedented situation. The consequences of this situation and of the new rules for calculating the TIVUL taxable amount are still being analysed. Open questions include whether the new rules themselves are lawful, given that they were not approved by the Spanish Parliament but brought in by the Spanish government by way of a fast-track procedure.

In this unique scenario, taxpayers should assess their situation carefully to determine how the new TIVUL rules might affect them and whether they should take legal action to protect their interests.

Epilogue: Basque Country and Navarra

The Constitutional Court’s judgment formally affects neither any of the Historical Territories of the Basque Country nor Navarra, since the declaration of unconstitutionality only relates to the articles of the state Local Treasuries Law and not to the regional TIVUL regulations applicable in these territories.

The relevant provisions in the regional TIVUL regulations are, however, identical or analogous to the articles which were declared unconstitutional. So, while the aforementioned territories are competent to regulate their own TIVUL rules, they will have to adjust their respective regional regulations in light of the Constitutional Court’s judgment. For taxpayers considering legal action, it is important to note that this will look different in the Basque Country and Navarra than the rest of the Spanish territory.


uriamenendez, real estate sector, spanish tax, tax