The Constitutional Court declares the method of calculating the basis of capital gains tax unconstitutional
Abolition of the capital gains tax by the Constitutional Court

The Constitutional Court declares the method of calculating the basis of capital gains tax unconstitutional

The Constitutional Court declares the method of calculating the basis of capital gains tax unconstitutionalWhat is the capital gains tax?

The municipal capital gains tax is a direct tax that is operated and managed by local councils. It is paid when a taxpayer sells, donates or inherits a property. The tax is applied to the revaluation of a property from the time of purchase to the time of transfer, whether by sale, inheritance or donation.

Who pays it?

When a property is sold, it is the seller who has to pay the tax as he is the one who enjoys the revaluation.

How is it calculated?

To calculate the capital gains tax, the cadastral value of the property and the time elapsed from the time the property is acquired until it is sold or donated must be taken into account. In order to obtain the taxable base on which the tax will be applied, revaluation rates established by the local councils are applied, which vary according to the number of years the property has been owned. These revaluation rates are around 3% per year. Once the taxable base has been determined, the tax rate also set by the local council is applied, with a maximum of 30%. The resulting amount is the amount the taxpayer must pay as capital gains.

For example, a taxpayer who bought a flat in 2010 with a cadastral value of 150,000 euros and sold it at the beginning of 2021 should check what the revaluation of his property has been. Assuming that his local council has fixed the maximum rate of revaluation, for a period of up to 15 years he is entitled to a rate of 3.2%. Therefore, the revaluation of the cadastral value of the property will be the result of multiplying 3.2 by the 11 years that the property was owned. The result would be 35.2%, which applied to the cadastral value of 150,000 euros leaves a taxable base of 52,800 euros for the case in question. The tax rate would be applied to this amount. Assuming that in that municipality it was the maximum of 30%, that person would have to pay 15,840 euros.

The Constitutional Court declares the method of calculating the basis of capital gains tax unconstitutionalWhy did the Constitutional Court annul the tax?

The main reason is the absence of market reality as to whether prices can go down or not. The recently annulled system understood that prices always go up and not down.

According to the judgment, the Court defines it as follows: “it establishes an objective method of determining the tax base which dictates that there has always been an increase in the value of property during the period of taxation, irrespective of whether there has been such an increase and irrespective of the actual amount of that increase”.

What are the consequences?

The ruling will affect all those transactions signed from now on (27-10-2021) or cases that are already appealed but will not have retroactive effects for situations where there is no longer a possibility to appeal or where appeals were firmly rejected in the past.

Because of the above, local councils will not be able to collect this tax until the Treasury changes the rule to reform the tax.  Therefore, de facto, the tax will be annulled until then.

Candice Doignies | 28/Oct/2021

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