The Constitutional Court, on 7 June 2023, has dismissed the constitutional challenge raised by the Administrative Litigation Chamber of the High Court of Justice of Andalusia, Ceuta, and Melilla, located in Malaga, regarding paragraph 21 of the first article of Law 26/2014, dated November 27, amending, among other regulations, Law 35/2006, dated November 28, on Personal Income Tax (IRPF).
The issue raised a question of whether the principle of economic capacity under Article 31.1 of the Spanish Constitution requires that the law takes into account inflation when determining the amount of capital gains derived from the transfer of real estate, so as not to tax purely nominal gains. In the case that gave rise to the question, the Spanish Tax Agency (AEAT) had demanded Personal Income Tax (IRPF) on the capital gain realized from the transfer of a property acquired in 1995 and sold in 2016, without adjusting the acquisition value according to the changes in the Consumer Price Index between those years. In doing so, it applied the wording of Article 35.2 of the IRPF Law as amended by Law 26/2014, which eliminated the coefficient of updating the acquisition value of real estate that was in effect until that time.
The elimination of the updating coefficients for real estate in 2014 was based on the argument that real estate gains were the only item in the Personal Income Tax (IRPF) that took into account the evolution of prices, and this differential treatment was not justified.
Furthermore, it emphasizes that the law in question cannot be analyzed in isolation but must be considered in conjunction with the rest of the provisions of the IRPF, which already grant preferential treatment to real estate gains compared to other income sources. Real estate gains are subject to lower tax rates than salary or business income and also benefit from certain exemptions when they arise from the primary residence.
The judgment concludes that the principle of economic capacity does not imply an obligation for the legislator to always and in all cases provide for the updating of the acquisition value of real estate, singling out real estate gains by means of a specific adjustment for inflation that is not applied to any other element of the Personal Income Tax (IRPF), nor to other taxes that also impose taxes on capital gains. This represents a legitimate choice, which may be subject to disagreement from a political or legislative standpoint, but it does not constitute a case of unconstitutionality due to omission.
The judgment includes dissenting opinions from judges Ricardo Enríquez Sancho and Enrique Arnaldo Alcubilla. They argue that the reform introduced by Law 26/2014 in the calculation of capital gains in the Personal Income Tax (IRPF) has resulted in the mere difference between the value of an asset at the time of acquisition and at the time of transfer being considered as revealing an economic capacity subject to taxation, without taking into account the erosion caused by the passage of time (inflation) on purely monetary gains. This erosion may mean that such gains may not have actually occurred or may have occurred but at an amount lower than nominally stated. They believe that, with this reform, citizens are being taxed for realisations of wealth that are wholly or partially inexistent, in direct contradiction to both the principle of economic capacity and the fair tax system referenced in Article 31.1 of the Spanish Constitution (CE).
In their view, not only is the taxation in common territory more burdensome than in the historic territories of the Basque Autonomous Community, but it also diverges from current trends in OECD countries in general and in countries within our region, such as Germany, France, Italy, Luxembourg, or Portugal, in particular.