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After long debate, Supreme Court rules client must pay mortgage tax

In a 15 to 13 vote, justices from one of Spain’s top tribunals reversed a decision to make banks pay, triggering loud protests from society and calls for street demonstrations

Tribunal Supremo hipotecas
Protestors outside the Supreme Court on Monday.

The Spanish Supreme Court has done a U-turn again: it is the clients who must pay for a controversial mortgage tax, and not the banks. The Impuesto sobre Actos Jurídicos Documentados (AJD) is a stamp tax paid in Spain by the homebuyer at the time of purchase, when a notary officially documents both the sale and the bank loan.

The decision was reached on Tuesday evening in the Administrative Division of the Supreme Court after two days of intense debate, and with just two votes of difference: 15 justices were in favor of making the client pay the levy, and 13 voted to confirm a groundbreaking decision reached by this same court in mid-October that it should be the banks who pick up the tab. 

The vote comes after three weeks of legal chaos that have evidenced a fracture within the Supreme Court and damaged its public image. While bank shares started to gain value on the trading floor following news of the court’s decision, Spanish political parties, consumer groups and unions immediately issued highly critical statements.

Street protests

Leaders of the anti-austerity Podemos party have already announced protests over a decision that “calls into question” the court’s independence and undermines democracy, in the words of party leader Pablo Iglesias. “Shame and anger should turn into a great civic mobilization to defend the rights of the majority from the privileges of a minority,” he said.

Alberto Garzón, head of the United Left coalition, went even further: “Private banks are thieves, they are the main enemy of democracy and they are responsible for gutting our economies. A majority of the Supreme Court sides with them, ratifying that justice has a price and that the system is rotten and spent,” he tweeted.

People protesting outside the Supreme Court on Tuesday.
People protesting outside the Supreme Court on Tuesday. EL PAÍS

Both leftist leaders have called a street protest outside the Supreme Court for Saturday at 6pm.

“One cannot subject millions of families to such uncertainty and make such a spectacle of oneself,” said Albert Rivera, the head of center-right group Ciudadanos.

The government of Pedro Sánchez, of the Socialist Party (PSOE), has not yet taken a public stand on the issue, but said it will “analyze and study the impact of the ruling.” Reforms to existing mortgage legislation are already underway in parliament in order to adapt to EU norms, and the executive could introduce new measures to make the banks pay some of the costs now borne by clients. The secretary general of the conservative Popular Party (PP), Teodoro García Egea, confirmed his group will work toward legislative reform.

Impact on the deficit

Finance Minister M.J. Montero speaking on Tuesday.
Finance Minister M.J. Montero speaking on Tuesday. EFE

Earlier on Tuesday, Finance Minister María Jesús Montero had said that if the court ruled in favor of clients and made the measure retroactive for four years, the claims could have an impact on regional coffers of up to €5 billion. She warned that this could affect the national public deficit and compromise EU deficit targets.

“The impact on regional coffers in a four-year retroactivity scenario would be of €5 billion, but the claims would be directed at the lenders,” said Montero at an economic forum in Madrid. “It is not the state who would have to put up the money.”

A reversal

On October 19, the president of the administrative division of the court, Luis Díez-Picazo, opted to revise the new criteria that the court had established days before, when a panel decided that it should be the bank, and not the client, who pays the AJD tax on the basis that it is the lender who needs a public document registering the loan, and not the homebuyer. This ruling in itself constituted a reversal of 20 years of jurisprudence confirming that clients are responsible for paying this tax.

Podemos and IU have called a street protest outside the Supreme Court for Saturday at 6pm

A total of 28 justices from the Administrative Division of one of Spain’s top courts gathered this week to debate the new criteria, which ruled that the bank was the only party with an interest in getting the loan certified by a notary, because this is what allows the lender to initiate foreclosure proceedings if the borrower defaults on payments. Because the lender is awarded this privilege through the public document, the lender should pay the fee, said the judges on October 13.

Had the judges decided in favor of homeowners this week, they would have also had to decide whether to make the measure retroactive – and how many years back – opening the door to claims from thousands of clients.

“Many of the decisions made by this division have consequences representing millions of euros,” said one judge. “We have to be aware of this to be able to make a very strict decision. But we cannot help that this fact has an influence on our decision. We are used to this.”

What is the AJD?

The Actos Jurídicos Documentados (AJD) is paid on certain documents that are signed before a notary, such as a mortgage. The amount is a percentage of the loan, and this figure depends on the region of Spain where the home purchase is taking place. This tax is collected by the regional governments, and last year it represented a collective €8 billion in revenues. Some regions apply a 0.5% fee, such as the Basque Country. Others, like Andalusia or Aragón, have set this fee at 1.5%.+6+

However, the tax is not calculated on the amount of the loan itself, but on the mortgage guarantee, which is the sum of the loan amount, interest, late fees and legal expenses in the event of default – a fact that could significantly raise the final figure. The consumer group OCU figures that for a mortgage of €150,000, with a mortgage guarantee of €270,000 and an AJD rate of 1.5%, the fee would mean €4,050. This is on top of other transaction expenses involving the notary, property registrar, property valuation and gestoría.

English version by Simon Hunter and Susana Urra.

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