B Law & Tax
10 November 2023

Tax advisor: Constitutional Court Decision on Wealth Tax in Madrid

The Constitutional Court has rejected the unconstitutionality appeal filed by the Community of Madrid against Law 38/2022, which establishes the temporary solidarity tax on large fortunes. The Community of Madrid argued that this tax interferes with its financial autonomy by nullifying the management of devolved taxes, especially the wealth tax, and that it harms its taxpayers.

However, the court considered that the loss of tax incentives in Madrid does not prevent the State from establishing new taxes. In addition, other arguments related to the confiscatory nature, economic capacity, and retroactivity of the tax were dismissed. Despite the decision, some justices issued a dissenting vote, stating that the appeal from the Community of Madrid should have been accepted.

The judgment rejects the presented objections. Regarding the manner in which the wealth tax was approved, the court argues that it complies with the Constitution, as it is related to the original purpose of the proposed law, which sought to provide public revenue to address the energy and price crisis caused by the conflict in Ukraine. Despite the objection from some justices who considered that the amendment did not meet the required connection.


Financial Autonomy

The judgment emphasizes that the wealth tax complements the Wealth Tax, which is under state competence devolved to the Autonomous Communities. The wealth tax does not affect or interfere with the autonomous competences related to the Wealth Tax, as the amount paid under the latter is deducted when calculating the new tax liability.

Furthermore, decisions regarding the minimum exempt amount, the tax rate, deductions, and bonuses in the Wealth Tax will continue to be determined by the Community of Madrid. However, some dissenting justices argue that the contested law seeks to neutralize the bonuses granted by some Autonomous Communities in the Wealth Tax without following the proper procedure, which they consider a violation of the political and financial autonomy of these regions, including the authority to grant bonuses on devolved taxes.


Conclusion on Autonomous Competences

The Court concludes that the wealth tax does not affect autonomous competences and only applies to residents of the Community of Madrid with a wealth exceeding 3 million euros, reducing the fiscal attractiveness of the region. However, the Court considers that this loss of attractiveness should not prevent the State from establishing new taxes and harmonizing the tax scope. Additionally, the Community of Madrid’s claim regarding the confiscatory nature and economic capacity of the tax is rejected, arguing that it would only be confiscatory if it depleted the value of the wealth, which was not demonstrated in the lawsuit. The effective tax rate of the tax remains below 0.5% of the taxed wealth, considered proportional.


Presumed Retroactivity

The judgment highlights that the wealth tax is not applied retroactively to a fiscal period but affects only a specific date (December 31, 2022, and 2023). Therefore, no retroactive effects are generated at the time of its entry into force, and this does not violate the principle of legal certainty. However, the justices supporting the dissenting vote in this judgment argue that the contested provision violates the principle of legal certainty, as the tax is applied for the entire fiscal year 2022 and comes into effect almost at the end of the fiscal year (December 29, 2022), preventing taxpayers from properly planning their economic affairs. They also argue that this affects the legitimate trust of taxpayers.



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