The General Assembly of the Constitutional Court has begun its session. The Andalusian High Court of Justice rejected the question of unconstitutionality raised by the Contested-Administrative Chamber. Ceuta and Melilla amended article 21 of article 1 of the 2014 personal income tax law, and the legislator is not required to factor inflation into real estate gains when computing personal income tax obligations.
The case raises the issue of whether the principle of economic capacity enshrined in Article 31.1 of the Constitution is valid. It questions whether the law must take inflation into account when determining tax bases. In essence, the matter concerns the calculation of capital gains derived from the transfer of real estate and the possibility that fully nominal gains could escape taxation.
In the specific dispute, the State Tax Administration sought personal income tax on capital gains from the sale of real estate acquired in 1995 and disposed of in 2016, without updating the purchase value to reflect price index changes between those years.
However, the administration applied the language of Article 35.2 of the 2014 Income Tax Law, which removed the historical adjustment coefficients for the acquisition value of real estate. The court’s ruling notes that the action is unconstitutional by omission, a conclusion that can only be understood if the Constitution itself imposes a duty to dictate certain rules of constitutional development to the legislature and the legislature fails to enact them. For this reason, the court proceeds to its analysis.
The economic capacity doctrine
The court recalls the constitutional doctrine on the principle of economic capacity, noting a 2021 ruling that declared the system for calculating the tax base from the appreciated value of urban land (municipal capital gains) unconstitutional. The core idea is that taxes should reflect real capacity to pay, and that the tax liability must be quantified accordingly. Yet the legislature enjoys substantial discretion to determine the amount of tax within the bounds of reasonableness and proportionality. The 2014 update coefficients for real estate were justified by treating property earnings as the only item of personal income tax that accounts for inflation without a broader justification for this differential treatment.
This line of reasoning echoes the February 2014 expert reform report on the tax system, produced just before the reform at issue. On inflation adjustments, the Constitutional Court had previously rejected a blanket approach for municipal capital gains, maintaining that the nominal principle could align with the constitutional order, but only in extreme circumstances of inflation would the legislature need to act to prevent erosion of the economic capacity principle.
The Court analyzed the situation before and after the 2014 reform, noting an average annual inflation of 2.37 percent from 2004 to 2014 and 1.80 percent from 2014 to 2023. Those figures do not meet the threshold of extreme or particularly acute inflation. The court also stressed that the rule under scrutiny cannot be reviewed in isolation; it must be evaluated alongside other personal income tax provisions that provide more favorable treatment to capital gains from real estate than to wages, salaries, or other income, and that offer exemptions when gains arise from a habitual residence.
Recognizing the broad discretion afforded to the legislator in this area, the decision highlights that modern personal income tax reforms have proposed multiple inflation adjustment options for different assets over time. The same conclusion is drawn from comparative analysis with other autonomous regions. In the Basque Country, inflation adjustments continue for both real estate and other heritage items, while Navarra has not foreseen them for any category in the general regime since Law No. 26/2014 was enacted.
The ruling concludes that it is not possible to deduce from the economic capacity principle a perpetual obligation for the legislator to update the acquisition value of real estate or to isolate gains from inflation through a dedicated adjustment that does not apply to other capital gains or to municipal or corporate taxes. While such a choice remains politically and legally debatable, it does not by itself establish unconstitutional omission.
Individual votes
Two judges, Ricardo Enríquez Sancho and Enrique Arnaldo Alcubilla, issued separate opinions. They argue that the 2014 reform of capital gains calculation makes the difference between an asset’s acquisition value and its sale value a vehicle for taxing a supposed economic capacity that may not have materialized after inflation. Essentially, they suggest the reform could tax citizens for non existent wealth, contradicting both the principle of economic capacity and the broader tax framework. They contend that taxation should apply only under Article 31.1 of the Constitution and that this approach aligns less with current OECD trends, including countries such as Germany, France, Italy, Luxembourg, and Portugal, than with the common framework of Spain’s autonomic regions.