It goes on and on! The never-ending story between municipal capital gains and the taxpayer.

We all remember 26 October 2021, the date on which the Constitutional Court published informative note number 99/2021, in which it ruled unconstitutional the objective method of determining the taxable base of the Tax on the Increase in Value of Urban Land (''IIVTNU''), on the grounds that it indiscriminately subjected to taxation any urban land subject to transfer, presuming the existence of an increase in value in all cases.

The High Court recognised that the historical method of determination contravened one of the fundamental pillars of the Spanish tax system: the principle of economic capacity provided for in Article 31 of the Spanish Constitution, which establishes the obligation of all Spanish citizens to progressively support public expenditure in accordance with their economic capacity, without this contribution being confiscatory in scope.

However, the previous declaration of unconstitutionality caused a stir among the legal sector, as the sentence itself limited its effects by stating that tax obligations accrued by the Tax, as of the date of the sentence, that had been definitively decided by a judgment with the force of res judicata or by a firm administrative resolution, including provisional or definitive assessments that had not been challenged as of the date of the judgment, and self-assessments whose rectification had not been requested pursuant to article 120.3 of the General Tax Law, cannot be subject to review.

The limitation of effects expressed by the Constitutional Court is of substantial relevance, especially considering that in the year 2017, in its Judgment 59/2017 of May 11, 2017, it did not impose any restriction on the legal effects arising from the declaration of unconstitutionality of any situation in which a taxpayer had been taxed by the Tax without an increase in the value of urban land, deploying effects ex tunc (that is, from the beginning).

However, we must not forget the principle of legal certainty which, in turn, prevails in the Spanish legal system, upon which article 40.1 of the Organic Law of the Constitutional Court is based, and by virtue of which, in any case of unconstitutionality, the review of processes concluded by a judgment with the force of res judicata is denied, except in the criminal jurisdiction or administrative sanctioning jurisdiction. Therefore, by logical inference, the legal system opens the door to the review of all those procedures lacking a firm judgment, allowing them to be submitted to a procedure for the refund of undue payments (article 221 of the General Tax Law) or to a revocation procedure (article 219 of the General Tax Law), as appropriate.

What happens in cases where there was never an increase in value on the occasion of the transmission?

The latest ruling provided by the Supreme Court is the judgment of February 28, 2024, through which the taxpayer is allowed to claim and/or refund the Municipal Capital Gains Tax (IIVTNU) paid through the procedure of full annulment (article 217 LGT) when they duly prove the non-existence of an increase in the value of the land subject to the transmission, even in cases where the tax assessment has become final.

Indeed, while Constitutional Court ruling 182/2021 limited the effects arising from the declaration of unconstitutionality, it is the essence and purpose of the declaration of unconstitutionality to remove the effects of any act carried out through a law deemed null and devoid of legal effects. Therefore, except for the express limitation imposed on proceedings resolved by a judgment with the force of res judicata, the scope of the declaration of unconstitutionality is retroactive and hence, its retroactivity is expressly allowed.

Taking the foregoing into account, the Supreme Court overturns both judgments as follows: (i) on the one hand, recognizing the full unconstitutionality and nullity of the rules that until the year 2017 subjected to taxation situations lacking economic capacity, and (ii) on the other hand, excluding any limitation on review in all cases where there is no final judgment and the taxpayer can demonstrate taxation in situations where there has been no increase in land value, as the general duty to eradicate the negative effects derived from the constitutional injury to the principle of economic capacity must not be overlooked.

However, it should be noted that, as is customary, the Supreme Court keeps an ace up its sleeve by concluding that, even though the action for annulment is imprescriptible, in the face of a review procedure under the terms indicated, the time elapsed between the payment of the tax assessed by the act nullified ab initio and the date of the review instance under article 217.1 g) LGT must be weighed.

What happens to the State Legislative liability?

Considering the juridical-doctrinal debate caused by the limitation of legal effects proclaimed by Constitutional Court ruling 182/2021, countless taxpayers urged the liability of the Legislative State in the terms of article 32.4 of Law 40/2015, of October 1, understanding the precedence of their right to compensation when they had obtained a final dismissive judgment against the tax assessment in question, provided they had alleged the proclaimed unconstitutionality.

Let us remember that the sine qua non requirements to recognize the State's patrimonial liability are: (i) exhausting all judicial instances against the administrative action and (ii) alleging in those procedures the unconstitutionality of the rule, as well as proving the causal relationship between the unlawful damage and the taxpayer.

In the case resolved by Supreme Court ruling 185/2024, dated February 2, 2024, although the party consistently invoked the unconstitutionality of the Municipal Capital Gains Tax (IIVTNU) for contravening the principle of economic capacity, the Supreme Court considers that there is no unlawful damage that should be subject to compensation, as there was indeed an increase in the value of the urban land justifying the imposition of the tax. Furthermore, the Supreme Court reiterates that the removal of certain provisions from the legal system does not automatically imply the classification of the IIVTNU paid as unlawful, but rather it expressly requires the non-existence of the taxable event that determines liability for the tax, that is, the proof that there has been no increase in value or that the amount determined by the Administration is incorrect.

In conclusion, there is no automatic link between the declaration of unconstitutionality and the existence of unlawful damage that would allow the exercise of the right to compensation; rather, the party concerned must prove the existence, effectiveness, and amount of the damage suffered.