18 October 2022

Antonio Puentes, head of the tax controversy department in BDO |

Over the past few decades, one of the most litigious matters in the area of taxes has been the substantiation of values declared by taxpayers –particularly in the case of real estate- for the purpose of calculating Property Transfer Taxes (“ITP” by the Spanish acronym) when the acquisition is for valuable consideration, or Inheritance and Donation Taxes (“ISD” by the Spanish acronym”) when the acquisition is not for valuable consideration.

Traditionally, the Tax Authorities of the Autonomous Communities –the ones legally competent for the abovementioned taxes, given that the State devolved these functions- would question the values declared by taxpayers in the public deeds formalising the properties’ sale or hereditary allocation, initiating the obligatory procedures for substantiating the declared values, which almost always resulted in a new tax settlement –and sometimes even in additional fines- which increased those transactions’ tax cost. The Tax Authority would usually carry out the valuations in different ways, many of them indirect or through an evidential analysis of the property’s age, location, comparable properties, etc., but without an in-person survey or inspection of the property that took into account the particular and specific circumstances of the individual property.

Because of this situation, taxpayers were able to challenge the valuations made by the Autonomous Community’s Tax Authorities and initiate administrative procedures to have the valuations confirmed, and it could take a long time for these proceedings to reach the courts. As a result, the Spanish Supreme Court (“TS” by the Spanish acronym), in its role as the highest authority and interpreter of ordinary law, established the legal doctrine that should be followed by all Autonomous Communities and that, in summary, meant that it was obligatory, in cases where the declared values were contested, for the Tax Authority questioning the value declared by the taxpayer to substantiate its grounds by means of an in-person and individualised survey of each property, taking into account the exact circumstances of each property, without any valuation that did not involve a, so to speak, “personal visit” from the Autonomous tax office to the property, being admissible.

In response to this legal doctrine –and by invoking the always plausible desire to “reduce tax litigations”, as per the express declaration of the Legislator- Law 11/2021 of 9 July (Official State Gazette of 10 July 2021) was enacted and introduced, with full legal effect from 1 January 2022, the so-called “benchmark value”, which basically consists of a value determined by the General Directorate of the Cadastre (a state body), which is then used as the assessment base to calculate the ITP and ISD taxes; in other words, when a property transfer transaction is subject to either of these taxes, the assessment base of the corresponding tax must be the “benchmark value” of that property, without any other value that the taxpayer might consider applicable being acceptable, unless that value is more than the benchmark value itself. Therefore, it is no longer necessary to have an in-person visit by a tax inspector to the property, as envisaged by the Supreme Court’s jurisprudential doctrine: the benchmark value determined by the Cadastral Authority each year shall prevail in all cases.

Furthermore, if the transfer is subject to the ITP or AJD tax under the modality in which stamp duty applies to the first copies of public deeds that are issued for real estate properties and the assessment base is determined by the value of these properties, that base may not be any lower than that which would result from applying the benchmark value.

Finally, when the benchmark value is used as the assessment base for the tax applied to a property’s acquisition, this value will be taken into account when applying the rule for determining the assessment base of the Property Tax (“IP” by the Spanish acronym) to which it may be subject, as applicable. Therefore, the benchmark value will only affect the IP in respect of properties acquired as from 1 January 2022, and not any pre-existing assets/property, in any case.

As an example: a house is sold and the two parties agree a price of 200,000 Euros. If the benchmark value as determined by the General Directorate of the Cadastre is 300,000 Euros, the taxpayer must declare, for the purposes of the property transfer tax (“ITP”), the amount of 300,000 euros. If, for example, the benchmark value had been 100,000 Euros, but the parties had agreed the price of 200,000 Euros, the latter value will have to be included.

Thus the benchmark value of the property will always be the minimum assessment base for calculating these taxes.

According to the Law itself, the benchmark value may never be higher than the “market” value, although it has to be noted that said “market value” will always be that determined by the General Directorate of the Cadastre each year. Effectively, the benchmark values of properties will be determined, from year to year, by applying average value calculation modules, based on the prices of all the property sales effectively made before a notary public or recorded in the Property Registry, and obtained in the context of the annual real estate reports prepared by the General Directorate of the Cadastre.

The way in which the benchmark value is individualised for each property, based on the corresponding average value calculation modules, using coefficients and calculation rules, will be detailed in the annual resolutions issued by the General Directorate of the Cadastre, which will also be published on the Cadastre’s website (www.sedecatastro.gob.es).

What can the taxpayer do if they do not agree with the “benchmark value” that the Cadastre has determined for a property? Firstly, the taxpayer may contest the General Directorate of the Cadastre’s resolutions themselves (administrative proceedings), within one month as of the date of publication. The taxpayer may also, at any time, initiate cadastral regularisation proceedings in relation to the property’s characteristics. But the taxpayer may also, and this our concern here, wait until it is time to declare the corresponding tax on execution of a transaction, and challenge the submitted self-assessment (in which, we should remember, the taxpayer has been forced to use the benchmark value and no other value as the taxable base), which transfers the burden of proving that the benchmark is not the “real” value of “market” value on to the taxpayer, and the taxpayer will then have to prove this, normally by submitting an expert’s survey or opinion and initiating the corresponding judicial review, with the consequent legal costs.

A year on from the entry into force of this regulation, far from the Legislator’s expressed intention of “reducing tax litigations”, the amount of such litigations has in fact increased because taxpayers unhappy with the “benchmark values” assigned in some cases to their properties have initiated the corresponding legal challenges to defend their legitimate rights and interests. There has also been quite a lot of controversy about cases in which the General Tax Directorate has, in response to the queries submitted by taxpayers, determined that, for example, in cases of transmission of a social housing or council property (the value of which is normally set by the Autonomous Community), if the benchmark value is higher than that legally predetermined by the Autonomous Community’s Administration, that must be the value that is declared and the self-assessment must be challenged, on the basis that the correct value is the one established in the planning and housing regulations of the Autonomous Community, which flies in the face of the most elemental logic.

Quite apart from whether taxpayers can challenge their self-assessments in which the benchmark value based on an expert’s opinion has been used as the taxable base, the concept of the “benchmark value” raises serious concerns as to its compatibility with the constitutional principles of legal certainty (article 9.3 of the Spanish Constitution – “CE” by the Spanish acronym) and financial capability and tax legality (article 31.3 of the CE), especially now that it is known that the latest Ruling by the Constitutional Court (“TC” by the Spanish acronym), dated 26 October 2021, declared the concept known as “municipal capital gains” to be unconstitutional. It goes without saying that the abovementioned violations of constitutional principles may be invoked by taxpayers when submitting their legal challenges, so that the competent legal bodies may submit the corresponding question of unconstitutionality before the Spanish Constitutional Court.

Precisely, in the light of the abovementioned Sentence of 26 October 2021, it cannot be ruled out that, in cases where the TC declares a benchmark value unconstitutional, the effects of that declaration might be limited only to the taxpayer that has submitted that particular legal challenge.