Possibility of a refund of Wealth Tax (2021 and 2022)

Wealth tax paid for the 2021 and 2022 tax years could be refunded if the tax is ruled unconstitutional

In our May newsletter, “Key Points on the New Temporary Solidarity Tax on Large Fortunes”, we focused on analysing the new tax approved by the central government in December last year, which is complementary to – or the “alter ego” of – the Wealth Tax and was introduced with the government’s aim of “harmonising” regional taxation, but with the clear intention of nullifying the tax reliefs established by some autonomous communities in relation to this devolved tax.

Indeed, following the acceptance for consideration last March and April of the appeals on grounds of unconstitutionality lodged by the three autonomous communities most affected by the new Temporary Solidarity Tax on Large Fortunes (Madrid, Andalusia and Galicia), we suggested considering challenging the tax in light of a possible ruling that it was unconstitutional.

Now that the filing period for both the Wealth Tax (IP) and the Temporary Solidarity Tax on Large Fortunes (ITSGF) has ended, and given the spectre of possible unconstitutionality hanging over both, there is now an opportunity to challenge the tax returns already submitted in order to avoid situations becoming finalised that would be excluded from any subsequent ruling of unconstitutionality by the Constitutional Court (TC). In other words, only those taxpayers who have challenged their self-assessments prior to the TC’s ruling would benefit from the effects of any declaration of unconstitutionality of these taxes.

As regards the IP, this follows the decision to accept for consideration the appeal on grounds of unconstitutionality lodged against the new tax regulations introduced by the General State Budget Act for 2021, which reintroduced the tax on a permanent basis, whilst increasing the tax rate from 2.5% to 3.5%, which puts us in the position of having to consider challenging the tax returns for the 2021 and 2022 financial years.

The regulation of the IP has undergone various changes since its introduction in 1977, starting as a temporary and largely informative measure, followed by the transfer of its assessment, administration and collection to the Autonomous Communities, the subsequent 100% rebate and the reinstatement of its application through the Royal Decree-Law 13/2011
which, although initially introduced on a temporary basis for 2011 and 2012, has been extended over the years. Finally, the General State Budget Act for 2021 has made it permanent, applying to financial years from 2021 onwards, whilst also setting an increase in the tax rate from 2.5% to 3.5%, applicable to estates worth more than €10,695,996.06.

The challenge to constitutionality is based on the argument that the repeal of the tax’s temporary nature, thereby making it indefinite, amounts to the de facto creation of a new tax, and therefore the use of the Budget Act to carry out such a reform may constitute an abuse of legislative power that directly contravenes Article 134.7 of the Constitution, which expressly prohibits the creation of taxes by means of that legislative instrument.

On the other hand, the increase in the tax rate could, in turn, undermine the Article 31 of the Constitution, which establishes the principle of financial capacity and prohibits the confiscatory nature of tax payments, which could be the case here. In these circumstances, and in view of the possibility that the Constitutional Court may uphold the appeal, it is advisable to challenge the self-assessments for the 2021 and 2022 tax years, citing the aforementioned grounds of unconstitutionality; should these be declared null and void, this would entail a refund of the tax paid, together with the corresponding interest for late payment from the date of payment until the date of the actual refund.

The procedure would commence with a request for the rectification of the self-assessment returns submitted and the consequent refund of the unduly paid tax, on the grounds that they are null and void due to the unconstitutionality set out above; should this request be rejected, the appeal process would have to be pursued at the subsequent levels of review, so that these decisions do not become final whilst a ruling from the Constitutional Court is pending.

Furthermore, in light of the Constitutional Court’s most recent rulings and its tendency to limit the scope of its decisions by broadening the scope of ‘established situations’ – which, incidentally, appears to be endorsed, or at least respected, by the Supreme Court, in light of its most recent judgements – it is advisable to challenge the self-assessed tax returns and prevent them from becoming final before a judgement can be handed down. We are reminded of recent rulings concerning Royal Decree-Law 2/2016 of 30 September on instalment payments for corporation tax by large companies, and the regulations governing municipal capital gains tax, in which, after declaring the legislation unconstitutional, null and void and removing it from the legal system, the Court limited the effects of the unconstitutionality by considering as established situations – and therefore unaffected by the declaration of unconstitutionality – those assessments or self-assessments which had not
had been challenged at the time the judgement was handed down.

In any event, it should be borne in mind that challenging self-assessments results in the interruption of the limitation period within which the tax authorities may carry out verification procedures; therefore, the advisability of doing so must be assessed on a case-by-case basis in each particular situation.