Does a property in Mallorca have to be subject to capital gains if its sale price is lower than the purchase price? The answer is yes, according to the rules of the tax law established by the state. However, each municipality has its own interpretation of the tax law. And for the courts, this is not the main criterion.

In accordance with the definition of taxable taxes based on the increase in value of a property on urban land (better known as municipal tax), the increase in value on which the municipal tax is levied is "the increase in value to which these properties are subject". Therefore, conversely, it should mean that if a property is sold with a loss in value and without a profit, this tax should not be levied. This is how the 3rd Administrative Court of Zaragoza interpreted this provision in a ruling of 13 July 2015, when it confirmed that the municipal tax can only be levied on the increase in value of a property.

However, the municipalities insist on the unconditional provision and payment of the property tax based on the methodology for determining the assessment rate (according to article 107 of Royal Legislative Decree 2/2004, revising the Law on Local Tax Offices), regardless of the result of the sale. With regard to this law, it is argued that article 107 ignores reality and creates a fictitious surplus, without taking into account the real circumstances, such as the real value of the property and the existence of an increase in value of the property.

However, we do not share this view of the municipalities. It is clear that if there is no increase in value on which a tax could be waived, the municipalities cannot simply "invent" a tax. This would make the law absurd.

As a consequence of sales well below value, at a sale price much lower than the target price or in cases of loss-making transactions, the sellers often have to pay an additional exorbitant tax rate to the municipalities as a result of this law, which far exceeds the income. More and more courts and supreme courts are also realising that this is unfair and are siding with the sellers. Among other things, the most recent ruling by the Administrative Court No. 4 of Valladolid on 31 July 2015 ordered the City of Valladolid to refund the amount of tax paid by the seller.

This ruling follows the same principles as previous rulings by the High Courts in Catalonia, Madrid and Valencia or the Administrative Courts in Alicante, Madrid or Zaragoza. Of particular note is an order issued by the Administrative Court of San Sebastian on February 5, 2015, which raises the question of the constitutionality of the formula for calculating the tax base. Claims will be accepted but processing will be suspended until a satisfactory answer is given to this question.

The rulings issued in recent years have led to a new legal basis that supports the view that the practice of applying the tax is unjustified. However, a clear statement from the Supreme Court is still awaited: so far, the Supreme Court has stated that if there is no profit, there is no taxable event and therefore no tax is to be paid. The problem is that this ruling only applies to the person who filed the claim and does not apply to other similar cases. This means, conversely, that a seller who is faced with the same problem must also file a lawsuit and initiate proceedings in which it must be proven that an unreasonable loss was incurred during the sale.

It then depends solely on the judge whether he considers the payment to be unjustified and asks the municipality to repay the withheld taxes to the seller or whether he agrees with the municipality.