Urban Land Tax declared partially unconstitutional by Spanish courts

The Spanish Constitutional Court (hereinafter, “the Court”) issued a Judgment on 16 February 2017 in which it declared the tax commonly known as “plusvalía municipal” as partially in breach with Article 31.1 of the Spanish Constitution.


The Urban land value increase tax (“ULVIT”) is a duty collected by local municipalities. ULVIT is levied upon ownership of urban land and the tax is triggered at the moment the property right over such land is transferred by any type of arrangement (i.e. sale and purchase, gift, inheritance, contribution in kind, etc.). The main characteristic of this tax is that it is assessed by taking into consideration a potential value increase rather than the actual increase in value of the land that may have occurred during ownership. Therefore, the tax is not assessed on the basis of the difference between the sales price and the acquisition cost, but based on the cadastral value of the land at the date of its transfer.

This objective way of determining the taxable base has been criticised as it may have been appropriate when the tax was designed in 1919, and also in subsequent decades when the effective increase in value was, in general, higher than the evolution of the cadastral value. However, it is not suitable when, due to the economic crisis, the market value of real estate falls below historic values.

In the underlying case, the Court had to decide whether the law that passes the ULVIT in the Basque Region of Guipuzcoa (i.e. the one applicable in the underlying case) is in breach of the Spanish Constitution, which rules the fundamental principle of economic capacity as well as the fundamental right of effective legal protection. The Basque Region has broad legislative and taxation powers, which means that its regional law on ULVIT substitutes the law applicable in the rest of Spain.

1. Infringement of fundamental rights and principles

The Court considers that, although the tax will only be applicable when, objectively considered, a plot of urban land increases in value; said objective increase has to be considered for tax purposes. However when market values drop and the taxpayer is in the position to prove that it experienced a loss, not accepting the loss and triggering the tax in these cases would infringe the fundamental right of being taxed only according to the taxpayer’s economic capacity, ruled by Article 31.1 of the Constitution.

Moreover, the fact that the local tax authorities determine the tax threshold based on the cadastral value of the land at the date of the transfer, without accepting, by virtue of the law, the evidence to the contrary provided by the taxpayer, is in breach of the fundamental right of effective legal protection ruled by Article 24 of the Constitution.

2. Basque law vs Spanish law

The Judgment of 16 February 2017 refers only to the Law applicable in Guipuzcoa rather than the law applicable in the rest of Spain. Nevertheless, taking into consideration that a further eight questions of unconstitutionality are currently pending before the Court, regarding the Law applicable in the Common territory (i.e. all Spanish regions except the Basque Region and Navarre), it will likely not be long before the Court declares the partial unconstitutionality of the law applicable in the rest of Spain too, in line with the arguments expressed above.

3. Next steps

Thus, this judgment marks an important milestone, as it confirms the judgments issued by minor Courts in past years and, what is even more important, it opens the door for taxpayers to apply for a refund of ULVIT unduly paid in the past four years (i.e. those which are not yet barred by the statute of limitations). Taxpayers can also claim for those payments made in years that are now barred or that have been taken to court and where the judgment is final; however they have to do so via the procedure for claiming financial liability from the State. This procedure has been amended by Law 40/2015, of 1 October, on the Legal system of the public sector, because starting these claims is now more difficult than it was before this law came in to effect on 2 October 2016.

How BDO can help

BDO’s tax team has been assisting our clients in filing appeals and claims against the ULVIT assessments both issued by the local tax authorities as well as those filed by taxpayers since these changes came in to effect. As such, our teams have sound experience and deep knowledge of the key factors to acknowledge in order to successfully apply for the refund of the Urban Land Value Increase Tax.