As some of you will remember, last year after some regional governments decided to abolish wealth tax in their regions (wealth tax, transfer tax, inheritance tax and donation tax are regional taxes ) to attract investments , the central government created a tax they called solidarity tax which is in effect a national wealth tax but only applicable to tax payers worth over 3.000.000 euro. If those citizens lived in a region of Spain where wealth tax still existed they could deduct the wealth tax paid to the said region.
The different regions where wealth tax was abolished took this new tax to the Constitutional Court. The first case was presented by the regional government of Madrid and we now have resolution and it is not good.
The Constitutional court has declared the tax LEGAL.
WHAT WILL THIS MEAN FOR EX-PATS ?
If you live in a region where there is no regional wealth tax then then you will now have to pay this new NATIONAL WEALTH TAX , but only if you are worth more than 3.000.000 euro.
If you live in a region where regional wealth tax still exists then you will be paying this tax usually on net worth above 700.000 euro (this is different in some regions ) (with some deductible amounts) but then when you declare the new NATIONAL WEALTH TAX (solidarity tax ) (only payable on amounts above 3.000.000 euro), you would deduct the amount paid for regional wealth tax.
Please follow the full note in English issued the the Constitutional court where they explain the sentence.
SPANISH CONSTITUTIONAL COURT
INFORMATION NOTE No 92/2023
THE PLENARY OF THE CONSTITUTIONAL COURT DISMISSES THE UNCONSTITUTIONALITY APPEAL FILED BY THE
GOVERNMENT OF THE COMMUNITY OF MADRID AGAINST THE TAX ON LARGE FORTUNES
The Plenary of the Constitutional Court, in a judgment with Magistrate María Luisa Balaguer Callejón as rapporteur, has dismissed the unconstitutionality appeal filed by the Government of the Community of Madrid against the temporary tax on large fortunes created by Law 38/2022, of December 27 (art. 3).
The regional government appealing alleged that the tax violated the ius in officium of the members of parliament (art. 23.2 of the Spanish Constitution) since it was introduced by way of an amendment during the processing of a bill with a different purpose. In terms of competence, it claimed that the new tax violated the financial autonomy of the Community of Madrid and the organic law reservation regarding tax transfers, in connection with the wealth tax (IP) (arts. 156.1 and 157.3 of the Spanish Constitution). Additionally, it argued that the tax also violated the principles of economic capacity and non-confiscation (art. 31.1 of the Spanish Constitution) since the tax rates of the new tax are very high. Finally, it accused the tax of going against the principle of legal certainty (art. 9.3 of the Spanish Constitution) due to its degree of retroactivity affecting existing situations.
The judgment rejects all the challenges for the following reasons:
Starting with the procedural aspect, it applies the constitutional doctrine regarding the right to amend, according to which art. 23.2 of the Spanish Constitution is only violated when there is an obvious and manifest lack of connection between the content of the amendment and the initiative for which it is presented. This is not the case for the tax on large fortunes, as the bill that led to Law 38/2022 aimed to create two taxes (energy and banking) with the purpose of providing public revenues to address the consequences of the energy and price crisis caused by the Ukraine war, just like the contested tax. Therefore, the amendment meets the homogeneity requirement.
Regarding the alleged violation of financial autonomy, the judgment reminds that the tax on large fortunes is complementary to the IP, a state-owned tax transferred to the autonomous communities, so the amounts paid under the IP are deducted to determine the new tax liability. The new tax does not affect or interfere with any of the regional powers related to the IP. The minimum exemption, the tax rates, deductions, and bonuses applicable to the IP in the Community of Madrid will continue to be determined solely by the Community itself, and the tax on large fortunes does not bring about any changes.
The judgment emphasizes that the appeal does not identify any regional power that has been affected by the contested tax. The actual concern of the Community of Madrid, it clarifies, is that residents with a wealth exceeding 3 million euros (the only ones subject to the tax on large fortunes) will have to pay the new state tax, which makes Madrid less fiscally attractive for attracting such wealth. The Tribunal states that this objective cannot prevent the State from exercising its authority to establish new taxes. In the past, the Constitutional Court has recognized that the State can occupy a regional fiscal space to harmonize it, and it can certainly do so in its own fiscal space, as is the case here.
The infringement of the principles of non-confiscation and economic capacity of art. 31.1 of the Spanish Constitution is dismissed based on established constitutional doctrine. Contrary to the argument of the Community of Madrid that the tax rates of the new tax are very high compared to the current market returns, the judgment recalls that the tax on large fortunes would only be confiscatory if it depleted the value of the assets (which the complaint did not address), not the income generated by the taxed assets, which is a different expression of economic capacity. Furthermore, the appeal does not provide any data on the alleged disproportionality of the tax rates. In fact, the judgment cites data from the Spanish Tax Agency’s statistics, which indicate that the effective tax rate of the tax on large fortunes is below 0.5% of the value of the taxed assets, so it is not disproportionate.
Finally, regarding the alleged retroactivity, the judgment underscores that the tax on large fortunes is not applied for a tax period but only in reference to a specific date (December 31, 2022 and 2023). Therefore, at the time it comes into effect, there were no situations that had already started to produce effects, so it is not retroactive, and the principle of legal certainty is not violated.
It should be noted that the Governments of the Andalusian Regional Council, the Madrid Assembly, the Galician Regional Government, and the Regional Government of the Region of Murcia have also filed unconstitutionality appeals against the tax on large fortunes, and these cases will be resolved applying the doctrine established in relation to the appeal of the Government of the Community of Madrid.
art. 3 of Law 38/2022, of December 27.
In the first place, for the violation of arts. 1.1, 23.2, 66.2, and 87.1 of the Spanish Constitution, as the contested regulation was introduced through an amendment that lacks the minimum homogeneity connection required with the bill that led to Law 38/2022, of December 27. It is true that similar objections were rejected in Judgments 209/2012 and 50/2015, but that was because in those cases, the amendments created taxes, and the bills were related to tax measures. In contrast, in this case, despite what was stated in the judgment [FJ 2 C) b)], there is no constitutionally required object and subject matter connection (STC 136/2011, FJ 8) between the amendment introducing the temporary tax on large fortunes and the levies envisaged in the legislative initiative, which were not of a tax nature.
A dissenting opinion is presented in the judgment by Magistrates Ricardo Enríquez Sancho, Enrique Arnaldo Alcubilla, Concepción Espejel Jorquera, and César Tolosa Tribiño, who believe that the appeal by the Community of Madrid should have been accepted, declaring the law unconstitutional and null.
Secondly, because the impugned legal provision violates the financial and political autonomy of the autonomous communities, guaranteed by arts. 2, 156.1, and 157.3 of the Spanish Constitution. Article 19.2 b) of the Organic Law on the Financing of Autonomous Communities, which is part of the constitutional framework, provides that the autonomous communities can take over the bonuses for the wealth tax, and Law 22/2009 determines that they have the regulatory powers over bonuses on the tax liability in the wealth tax. The “harmonization” sought by Law 38/2022 with the creation of the temporary tax on large fortunes aims to neutralize the bonuses on the wealth tax established by some autonomous communities, without following the established procedure for modifying the conditions of tax transfers, which is a transferred tax, thus violating the political and financial autonomy of these regions, which includes the option to grant bonuses on transferred taxes.
Finally, the impugned provision violates the principle of legal certainty, recognized by art. 9.3 of the Spanish Constitution, and the protection of legitimate expectations that arises from it. Contrary to what the judgment states, according to the provisions of art. 3 of Law 38/2022, of December 27, the temporary tax on large fortunes applies to the entire year 2022, which was almost over when this law came into effect (on December 29, 2022, the day following its publication in the “Official State Gazette”). This prevented the taxpayers of the tax from organizing their economic relations with sufficient time. Furthermore, the creation of the new tax was not predictable since it could not be known for sure until the amendment was published in the “Official Bulletin of the Cortes Generales” on November 18, 2022, which further supports the violation of the constitutional principle of legal certainty (see, for example, STC 173/1996, FJ 3).
Madrid, November 7, 2023
