The Constitutional Court has ruled out that the legislator has to discount inflation to calculate real estate gains in personal income tax (IRPF)
In full, the Constitutional Court has dismissed the question of unconstitutionality raised by the contentious chamber of the Superior Court of Justice of Andalusia (TSJA) on a section of the personal income tax law.
What was raised is whether the principle of economic capacity -which refers to the real possibility or sufficiency of a natural or legal person to face a specific tax obligation demanded by a public administration- requires that the law take into account inflation to determine the amount of capital gains derived from the transfer of real estate, so that purely nominal capital gains are not taxed.
In the case studied, the Treasury had demanded personal income tax on the real estate gain arising from the transfer of a property acquired in 1995 and sold in 2016, without updating the acquisition value according to the evolution of the price index between the two years.
In a statement, the Constitutional recalls that the system for calculating the taxable base of the tax on the increase in the value of urban land (municipal capital gains) was recently declared unconstitutional, and dismissed, on this rate, that it should be calculated taking into account count inflation.
In that case, he assured that the nominalist principle is coherent with the constitutional order and that only “in extreme situations of especially acute inflation would the legislator be required to act to prevent inflationary erosion from negatively affecting the principle of economic capacity.”
The Court considers that the economic situation before and after the 2014 reform, with average inflation of 2.37% per year for the period 2004-2014 and 1.80% per year for the period 2014-2023, is far from qualify as “extreme” or “particularly acute”.
Likewise, it stresses that the rule under trial cannot be analyzed in isolation, but rather in conjunction with the rest of the provisions of personal income tax, which already grant preferential treatment to real estate gains over other income, since they are taxed at lower rates than income salary or business and also enjoy certain exemptions when they come from the habitual residence.
In its note, the Constitutional Court highlights that “a reflection of the wide margin that the legislator must be given in this area is that the successive personal income tax regulations have taken very different options on the inflation adjustment, applying it to all, some or none of the capital gains, according to the times”.
And the same conclusion is obtained from the analysis of personal income tax in the other autonomous territories; while in the Basque Country the adjustment for inflation continues to be applied, both for real estate and for the rest of the patrimonial elements, in Navarra it is not foreseen for any.
From the principle of economic capacity “it is not possible to infer an obligation for the legislator to anticipate, always and in any case”, the update of the acquisition value of the properties through an adjustment for inflation “that does not apply to any other element of the personal income tax , nor in other taxes that are also levied on capital gains, such as municipal capital gains or corporate tax”.
It is merely a “legitimate option”, from which one may disagree from a point of view of political or legislative opportunity, but which “does not imply a case of unconstitutionality by omission”.
The sentence has the particular votes of the magistrates Ricardo Enríquez and Enrique Arnaldo. They consider that the reform operated by Law 26/2014 in the calculation of capital gains in the personal income tax, has caused that the mere difference between the value of an asset at the time of acquisition and that of the transmission reveals an economic capacity susceptible to imposition, ignoring the erosion that the tyranny of time (inflation) generates on purely monetary gains to the point that they may well not have actually occurred, they may well have done so but for an amount less than the nominally manifested.
In this way, they estimate that, with this reform, far from taxing a true economic capacity, citizens would be taxed for totally or partially non-existent manifestations of wealth, in open contradiction both with the principle of economic capacity and with the tax system. just those referred to in art. 31.1 EC. In his opinion, not only the taxation borne in the common territory materializes, once again, in a much more burdensome way than in the historical territories of the Basque Autonomous Community, but it is placed outside the current trends in the countries of the OECD, in general, and those of our environment, in particular (such as, for example, Germany, France, Italy, Luxembourg or Portugal).
Likewise, the dissenting magistrates emphasize that the sentence approved by the majority justifies their decision in the following two ideas. On the one hand, in that the correction of the consequences of inflation on capital gains subject to tax does not correspond to a constitutional requirement, responding to a mere “legislator’s decision”. On the other hand, in that the suppression of the update of values ??that was foreseen exclusively for real estate “eliminates a factor of inequality between sources of income.”
Arnaldo and Enríquez are of the opinion, however, that the former is as much as consecrating constitutionally the “nominalist principle” as a governing element of the tax system, granting a “blank check” to the legislator for the taxation of fictitious income; and the second implies saving the denounced unconstitutionality of the norm by socializing its illegality since, instead of imposing the need to correct the harmful effects of inflation, the only existing one is suppressed, thus consecrating a kind of “equality in unconstitutionality”.
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