Solidarity Tax News

Solidarity Tax

On 28th December 2022, Law 38/2022 of 27th December was published in the BOE, creating the Temporary Solidarity Tax on Major Fortunes.

This new “tax on the rich” is a tax of a temporary nature, as the tax will in principle be applicable for the years 2022 and 2023. However, the door has been left open so that at the end of this period, the results can be evaluated and, depending on the results, its continuation or abolition can be proposed.

This new tax, whose purpose is to increase revenue and harmonise regional regulations, is provided for as a direct, personal and complementary tax to the Wealth Tax, which is levied on the net wealth of individuals above 3 million euros.  

This new tax applies throughout the country, following the rules of the Wealth Tax, and is not subject to transfer to the autonomous communities. 

In the case of personal liability (taxpayers resident in Spain), an exempt minimum of 700.000 euros is applied to the taxable base, taxing the net assets and taking into account possible exemptions, in accordance with the following scale:

On the other hand, individuals who do not have their habitual residence in Spanish territory according to personal income tax criteria are taxed by real obligation on the assets and rights they own when they are located, can be exercised or must be fulfilled in Spanish territory. In this case, the tax is levied exclusively on these assets or rights.

To avoid double taxation, Solidarity Tax taxpayers are only taxed on the part of their wealth that has not been taxed by their Autonomous Community in the Wealth Tax. 

Undoubtedly, this tax especially affects residents in autonomous communities where the Wealth Tax is subsidised, as is the case of Madrid and Andalusia, which is subsidised at 100%, or in the case of Galicia, which is subsidised at 50% from 2023 (25% in 2022).

This Solidarity Tax has been challenged as unconstitutional by the Assembly of Madrid, by the Governing Council of the Community of Madrid, by the Governing Council of Andalusia, by the Xunta de Galicia and by the Governing Council of the Autonomous Community of the Region of Murcia, so the future of this tax is conditioned not only by political developments, but also by the ruling of the Constitutional Court on these five appeals lodged against the tax.

Yesterday we heard the news that the Constitutional Court upheld the new Temporary Solidarity Tax on Major Fortunes, rejecting the arguments put forward in the appeal lodged by the Community of Madrid.

The first point of the Madrid Government’s appeal argues that the tax was introduced by an amendment to a proposal for legislation (not a draft law),  which is the legal mechanism to be used to approve this type of tax, that had a different purpose than the tax, namely to approve the levy on banks and energy companies. The Court points out that the right to amend is only violated when there is a lack of connection between the content of the amendment and the initiative, and in this case this is not the case because both the tax on the wealthy and the levies on banks and energy companies are created with the aim of obtaining public revenue to deal with the consequences of the energy and price crisis caused by the invasion of Ukraine.

The second point of his appeal is that the tax infringes the financial autonomy of the Community of Madrid, however, the Court responds that the tax on large fortunes is complementary to the wealth tax (which is managed by the Autonomous Communities), so that what is paid for wealth is deducted from Solidarity. Furthermore, it points out that the real objective of the Community of Madrid is that it loses its fiscal attractiveness in order to attract such wealth to its territory, and that this complaint cannot prevent the State from exercising its competence to establish new taxes.

It also rejects that the principles of non-confiscation and economic capacity protected by the Constitution are violated, as Madrid alleged when considering the rates too high, since according to the Court the tax would only have a confiscatory effect in the event of exhausting the value of the wealth, not the income generated by the taxed assets, which is a different manifestation of economic capacity. Furthermore, the ruling cites data taken from the Tax Office statistics according to which the effective tax rate for the tax on large fortunes is below 0,5% of the value of the taxed wealth, which means that it would not be disproportionate.

Finally, as regards the retroactivity of the tax, the ruling points out that the tax on large fortunes is not applied in relation to a tax period, but only by reference to a specific date (31st December 2022 and 2023). Therefore, at the date of entry into force there was no situation that had begun to produce effects, so it is not retroactive and there is no breach of the principle of legal certainty.

The magistrates who voted against this point affirm that the Temporary Solidarity Tax on Large Fortunes applies to the entire financial year 2022, almost exhausted when this law comes into force (on 29th December 2022, the day after its publication in the “Boletín Oficial del Estado”), This has prevented the taxpayers from organising their economic relations in good time and its creation was not foreseeable, since it could not really be known how soon until the publication of the amendment in the “Boletín Oficial de las Cortes Generales” on 18th November 2022, which further infringes the constitutional principle of legal certainty.

CONSEQUENCES:

This decision of the Constitutional Court has put paid taxpayers who have had to pay the tax to the Tax Administration to the ground that, in the event of a Court ruling against them, they could obtain a refund of the tax. The Constitutional Court has closed on previous occasions, as in the case of the Tax of Increase of the Land Value (Plusvalía), the possibility of recovering what had been paid if the self-assessment had not been challenged or the tax had not been appealed. 

Moreover, this endorsement of the tax would allow a possible PSOE and Sumar government to make the tax on the rich permanent, instead of only applying it for two years.

We will have to wait for the resolution of the appeals presented by the rest of the communities to determine whether they will continue along the same lines, thus setting a precedent.

Finally, it has been announced that Madrid will begin to charge wealth tax on wealth of more than 3 million euros following the Constitutional ruling, which will affect more than 10.000 taxpayers.