BackThe Constitutional Court has issued a ruling rejecting the deduction of inflation from real estate gains in the Personal Income Tax (IRPF). With this, it upholds the 2014 reform that eliminated the corrective coefficients that reduced the tax payable based on inflation. The ruling resolves the question of unconstitutionality raised by the High Court of Justice of Andalusia (TSJA) on the 2014 law, which modified the IRPF law eight years earlier. The TSJA raised the question of whether the principle of economic capacity established in Article 31.1 of the Constitution requires the law to take inflation into account when determining the amount of capital gains derived from the sale of property, thus avoiding taxing nominal capital gains.
The Constitutional Court has given a negative answer, referring to a previous judgment of the court itself. In that ruling, the idea that the municipal capital gains tax should be calculated taking into account inflation was rejected, and it was established that only in situations of “particularly intense” price increases would it be necessary for the legislator to take measures to prevent inflationary erosion from adversely affecting the principle of economic capacity. The Constitutional Court considers that the economic situation before and after the 2014 reform, with an average inflation of 2.37% per year between 2004 and 2014, and 1.8% per year between 2014 and 2023, is far from being qualified as “extreme” or “especially intense”.
In this case, the Tax Agency demanded IRPF on a real estate gain without updating the acquisition value. The Constitutional Court rules out unconstitutionality by omission and recalls the importance of the principle of economic capacity in the quantification of taxes. The legislator has a margin of freedom to determine the amount of the tax in a reasonable and proportional manner.
Elimination of the coefficients
The ruling argues that the elimination of the correction coefficients in 2014 was based on the fact that real estate gains were the only category of personal income tax that considered the evolution of prices, without an adequate justification for this differentiated treatment.
The court also mentions the “wide margin” that must be granted to the legislator on this issue. It considers that this is reflected in the different choices that have been made in successive IRPF regulations regarding the inflation adjustment, applying it to all, some or none of the capital gains, depending on the time. The ruling explains that the same conclusion is reached when analyzing the IRPF in other regions with autonomy in this respect. The Constitutional Court holds that from the principle of economic capacity cannot be deduced an obligation for the legislator to always provide for the updating of the acquisition value of real estate, through a specific adjustment to inflation, which does not apply to other elements of the IRPF or other taxes levied on capital gains, such as municipal capital gains or corporate income tax.
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