Spain's constitutional court has rejected the challenge brought by the Autonomous Region of Madrid against the Temporary Solidarity Tax on Major Fortunes (TSTGT).

The 'additional wealth tax' was introduced at the end of 2022, as a temporary measure to supplement Spain's existing wealth tax, covering the fiscal years 2022 and 2023, unless subsequently extended.

A 1.7% charge applies to assets from €3m to €5.35m, 2.1% on the next €5.3m and 3.5% on assets above €10.7m.

International law firm Osborne Clarke said in a briefing note on 10 November that the ruling was supported by the dissenting vote of four of the twelve judges who make up the Constitutional Court.

"The court denies that there is any infringement of the financial autonomy of the autonomous communities, as well as of other constitutional principles, such as the principle of legal certainty and economic capacity. 

"The court recently issued a press release rejecting the appeal lodged by the Community of Madrid against the TSTGF approved by the state government at the end of 2022.

"The tax affects individuals both resident and non-resident in Spain and is compatible with the Wealth Tax also in force. The tax applies throughout Spain, except in the Basque Country and Navarre, without prejudice to the different specialities applicable by virtue of the various international treaties."

Osborne Clarke further said: "In the first liquidation of the tax presented last July, the Tax Agency's collection amounted to 623 million euros, an amount considerably lower than estimated. The autonomous communities that collected the most were Madrid, Galicia and Andalusia, which were precisely the regions for which this tax had been set up. Madrid alone contributed 555 million euros.

"In this context, the Autonomous Region of Madrid lodged a constitutional challenge against the tax on 18 April. The legal grounds for the appeal were that the TSTGF infringed, inter alia, the principles of legal certainty, economic capacity and non-confiscation, as well as the political and financial autonomy of the autonomous communities.

"In addition to the Community of Madrid, the TSTGF was challenged by the governments of Andalusia, Galicia and Murcia. Both the Madrid Executive and the Junta de Andalucía requested the precautionary suspension of the application of the tax, which was denied by the Constitutional Court."

According to the press release, the CC ruling rejects all the grounds of challenge, the briefing note continued. 

Firstly, with regard to the possible infringement of the financial autonomy of the autonomous communities, the CC understands that the TSTGF is complementary to the Wealth Tax, so that what is paid by the latter is deducted from the former, so that, in its opinion, it does not affect any of the autonomous communities' competences.

"With regard to the possible infringement of the principle of non-confiscation, the CC considered that the tax would only have a confiscatory effect if it exhausted the value of the assets, not the income generated by the taxed goods, which is a different manifestation of economic capacity. On the other hand, and with regard to the possible infringement of the principle of economic capacity, the CC argued that the constitutional challenge did not provide any information on the alleged disproportionate nature of the rates of taxation of the TSTGF.

"Finally, regarding the retroactivity of the tax, the ruling underlines that the tax is not applied in relation to a tax period, but only by reference to a specific date (31 December 2022 and 2023). Therefore, despite the fact that the law approving the tax came into force on 29 December 2022, the CC considers that the TSTGF is not retroactive and does not infringe the principle of legal certainty.

"It is important to note that the ruling was supported by the dissenting vote of four of the twelve judges who make up the CC. They consider that the appeal should have been upheld for the following reasons:

"Breach of the principle of legality, which requires taxes to be created by law. It should be recalled that the approval of this tax was introduced by an amendment to a regulation whose purpose was to tax banking and energy companies, which had nothing to do with taxation.

"For infringement of the financial and political autonomy of the autonomous regions, which provides that they may assume the Wealth Tax rebates, and Law 22/2009, which determines that the regulatory powers in matters of rebates on the Wealth Tax quota are ceded to them.

"Finally, infringement of the principle of legal certainty and the protection of legitimate expectations which derives therefrom, since the TSTGF applies to the whole of the financial year 2022, which has prevented the taxable persons from organising their economic relations in good time and its creation was not foreseeable."