How should the value of land be determined for Municipal Capital Gains Tax purposes?

Ever since the Municipal Capital Gains Tax (IIVTNU)—commonly known as “plusvalía municipal”—was declared unconstitutional for taxing situations in which there is no increase in value, many contentious issues have arisen in relation to this tax, among them those relating to evidence. Indeed, proving that the value of the land has decreased is not always an easy task.

As we know, the Municipal Capital Gains Tax is levied on the increase in value of land (not of the building on it) that becomes apparent as a result of its transfer or of the creation or transfer of rights in rem limiting ownership over that land. However, there are numerous cases in which, when a property is transferred, it is difficult to separate the value of the land and the value of the building from the total transfer price, particularly where the deeds do not distinguish between those values.

The Supreme Court recently ruled on this question in its judgment of February 4, 2021, deciding cassation appeal (recurso de casación) no. 4847/2019.

The question admitted for cassation was framed as follows:

“In those cases in which it is necessary to separate the value of the land from the total transfer price in order to verify whether or not the land has increased in value (on which its liability to the Municipal Capital Gains Tax will depend), determine the following:

1. Whether the method consisting of calculating the proportion that the cadastral value of the land represents, at the date of the transfer, of the total cadastral value of the property is valid even though the deed of acquisition of the plot reflected the purchase price of the plot (a figure that might differ from the cadastral value assigned to it at the time of that acquisition).

2. Whether, if the first question is answered in the affirmative, that method must prevail over other means of evidence admissible in law.”

In short, the issue is whether, in order to establish the value of the land at the time of the transfer, it is valid to rely on the ratio between the cadastral value of the land and the total cadastral value and, if so, whether that approach (or method) must prevail over any other when separating the value of the land from the total value of the transfer.

In the case addressed in the judgment, there was no doubt as to the purchase price of the land, as it was reflected in public deeds (a plot was acquired on which a development of 37 homes was subsequently built). The deed of transfer states the total sale price, without distinguishing between the portion corresponding to the land and the portion corresponding to the building.

The taxpayer obtains the sale price of the land by applying to the sale price stated in the deeds the actual ratio between the cost of acquiring the land and the total cost of the development, allocating to the land a percentage of 19.92%. Applying that percentage and taking into account that value of the land at the time of the transfer, there would be no increase in the value of the land but rather a decrease, and there were therefore no grounds for assessing the IIVTNU.

As evidence, the taxpayer submits the following:

(i) thirty-seven general inventory reports and thirty-seven annexes confirming that ratio;

(ii) an expert report and a letter from the director of the valuation company VALTECSA confirming that percentage and stating that, on the basis of that percentage, “there has been no increase in value” when compared with the price of the plot;

(iii) the developer’s Corporate Income Tax (IS) return and annual accounts, in which those values are recorded.

However, the city council calculates the sale price of the land by applying to the total sale price stated in the deed (land and building) the ratio between the cadastral value of the land and the total cadastral value at the time of the transfer, which yields a percentage of 32.28%.  Thus, the difference between the acquisition value of the plot and the transfer value (determined in this way) reveals an increase in value and, therefore, the occurrence of the taxable event, so the tax would have to be assessed.

As can be seen, the importance of this issue is clear since, depending on the method used to calculate the value of the land, the result will be either an increase or a decrease in value. This is by no means immaterial for the purposes of assessing the Municipal Capital Gains Tax.

Faced with this situation, the Supreme Court rules as follows:

• Where the value of the land is unknown, it may be valid to obtain it using the method consisting of the proportion that the cadastral value of the land represents, at the date of the transfer, of the total cadastral value of the property.
• However, that method cannot be the exclusive or sole method, nor can it override any other means of evidence admitted in law.
• The “method” or “system” for determining the value of the land will depend on the circumstances of the specific case, since a taxpayer who remains completely silent on the matter is not in the same position as one who (as happened here) makes a full argumentative and evidentiary effort to try to show that, despite the lack of specification in the deeds of sale of the homes, the land’s share in the transfer it carried out was a specific percentage and not the one that objectively follows from that method.