Spanish Constitutional Court upholds the Temporary Solidarity Tax

The Spanish Constitutional Court has, in a split decision, rejected the appeal filed by the Governing Council of the Madrid region (the Madrid Council) that the new Temporary Solidarity Tax on high net-worth individuals enacted on 29 December 2022 is unconstitutional.

Background

In December 2022, Spain introduced a new temporary tax (for two years, 2022 and 2023) complementary to Wealth Tax to be charged on the net wealth of individuals exceeding EUR 3m. To avoid giving rise to double taxation, the new tax will be deductible for Wealth Tax purposes (this way the main impact will be borne by individuals residing in Madrid and Andalucía which do not levy Wealth Tax). Broadly, Spanish tax residents benefit from a general tax exemption on the first EUR 700,000 of net wealth, in addition to a EUR 300,000 exemption for their main residence. As a result, most Spanish tax residents would be taxed on net wealth above EUR 4m (see our previous article here).

On 31 January 2023, the Madrid Council lodged an appeal against the entry into force of the Temporary Solidarity Tax on high net-worth individuals arguing that it is unconstitutional.

The Madrid Council argued that there had been a  breach of the legislative procedure required for the adoption of a new tax (which requires its own draft tax law or at least to be included in a draft law initially dealing with other relevant tax matters). In addition, it was argued that it violated the fiscal autonomy of the Madrid region, as well as the principles of economic capacity and non-confiscation. Finally, it was also claimed that it breached the principle of legal certainty as it was approved retroactively for the year 2022.

On 7 November 2023, the Constitutional Court delivered  a disappointing verdict in the case.

Criteria of the Constitutional Court

The judgment rejects all the arguments put forward by the Madrid Council, with only very brief consideration of the arguments put forwards.

In terms of the alleged procedural breaches, the Constitutional Court has held that, although the creation of this new tax was not originally included in its own tax law nor in a proper draft law dealing with tax developments, the approval of the new Solidarity Tax was broadly linked to the initiative to create two levies related to the energy and banking sectors. The  ultimate purpose of these levies was to generate public revenue to assist with the financial crisis caused by the war in Ukraine. This reasoning is surprising, as the energy and banking levies were expressly categorised in such law as levies not having the nature of a tax.

Moreover, the Constitutional Court has held that the new tax does not violate the principle of fiscal autonomy, since it is complementary to the Wealth Tax, so that any Wealth Tax paid is deducted in determining the amount of the Solidarity Tax. Likewise, it does not violate the principles of non-confiscation and economic capacity as it does not fully deplete the value of the assets nor does it involve disproportionate tax rates (according to recent statistics mentioned by the Constitutional Court, the average effective rate is around 0.5% of the value of the taxable assets).

Finally, with regard to retroactivity, the Constitutional Court noted that the Solidarity Tax is not levied in relation to a tax period (a full calendar year) but by reference to specific dates (31 December of calendar years 2022 and 2023) and, consequently, at the time of its entry into force, there was no retroactivity even though the effective date was only two days after the enactment of the law. Accordingly, the Constitutional Court has held that there is no retroactivity or breach of the principle of legal certainty.

Comment

This judgment may be a foretaste of the direction in which the other appeals lodged by the Councils of Andalusia, Galicia and Murcia will be resolved. However, it might be noted that  the Court was divided in its decision, with seven votes in favour of rejecting the appeal and four against such rejection, such that it is far from certain that other appeals will go the same way.

The Constitutional Court also left open the question of possible infringement of EU law. Firstly, there is the argument that there is a potential breach of the free movement of capital given that both the minimum exemption of EUR 700,000 and the limit on the total tax liability do not apply to non-resident taxpayers but only to tax residents in Spain. Secondly, and more relevantly in this context, there are arguments based on indirect discrimination contrary to the right to free movement of EU citizens and potential infringement of the principle of legal certainty, as one of the basic principles of the rule of law inherent to the EU law.

Whilst the path to European justice remains open not only for regional governments but also for taxpayers filing appeals against their own tax returns (by asking the relevant court for a referral to the Court of Justice of the European Union for a preliminary ruling), this first validation of the new Solidarity Tax by the Constitutional Court is disappointing, and if confirmed in other appeals,  will have a significant impact on a number of resident and non-resident taxpayers who have been waiting for greater clarity since the enactment of this tax.

Following the publication of this judgment, the Madrid Council has announced that they will bring forward a legislative change with a view to disapplying the current 100% allowance, with a view to raising the tax for the regional treasury and "refund it" through other tax advantages to taxpayers resident in the Madrid region.