‘Spain: Court of Justice of European Union rules against the Spanish Inheritance and Gift Tax legislation’, by Mariano Gomariz, Tax Partner at ECIJA.

Executive Summary

On September 3, 2014, the Court of Justice of the European Union (hereinafter, ECJ) issued its final decision in the case C-127/12, concluding that the Spanish Inheritance and Gift Tax is not compatible with the EU freedom of establishment.

The decision of the ECJ confirms the position held by the European Union Commission in the Infringement Case opened against Spain (Commission’s case reference number 2004/4090). The Court has ruled that Spanish legislation constitutes an obstacle to free movement of persons and capital in breach of the Treaty on the Functioning of the European Union and the Agreement on the European Economic Area (Articles 63 and 40 respectively).

This decision is in line with the Yvon Welte v Finanzamt Velbert case C-181/12 concerning the estate of a Swiss national and resident comprising of Real Estate property located in Germany and certain bank accounts in Germany and Switzerland in which the ECJ ruled on October 17, 2013, that the German Inheritance Tax violated European legislation.

In light of the ECJ decision, Spanish Inheritance and Gift rules will now have to be amended to eliminate the declared discrimination.

Detailed discussion

Under the existing rules Spanish Inheritance and Gift Tax applies to Spanish resident heirs and donees and is charged on all assets received, either located in Spain or abroad. Non-resident beneficiaries are also subject to this tax as non-resident taxpayers, and must pay the tax in Spain only on the acquisition of assets and rights that are located, exercisable or to be fulfilled in Spain.

Spanish Law 22/2009 of December 18 recognizes legislative power for the Autonomous Communities (hereinafter, AC) and establishes the reductions, rates and coefficients to be applied in the absence of the AC regulations.

AC legislation does not apply where the taxpayer is a non-resident, this resulting in discriminatory situations as, for instance, in the case of inheritances in which the link is the place of death of the decedent. In those cases, an heir with residency in Mallorca is to be taxed in accordance with the legislation of the Balearic Islands if the decedent resided in this Autonomous Community, this resulting in nil taxation if the 99 percent tax credit applicable therein is applied. On the contrary, a UK or German heir of the same decedent will be subject to national legislation, pursuant to which that tax credit will not be applicable.

Notwithstanding the above, the ECJ affects a number of cases involving both resident and non-resident individuals. Besides the aforementioned discrimination case, the main situations affected by the ruling are the following:

In the case of non-resident individuals: (i) inheritances in which the decedent is not a resident of Spanish territory; (ii) donations of Real Estate properties located in Spanish territory; (iii) donations of Real Estate properties located outside Spain; (iv) donations of other assets and rights located in Spanish territory; and (v) donations of other assets and rights located outside Spain.

In the case of resident individuals: (i) inheritances in which the decedent is not a resident of Spanish territory and; (ii) donations of Real Estate properties located outside Spain and carried out by tax-resident individuals.

The Court concludes that the Spanish Inheritance and Gift Tax is, in all the aforementioned situations, in breach of EU Law.

Practical implications in Spain

As a consequence of the ECJ ruling it is clear that Spain must amend the current wording of the Law to bring Spanish legislation in line with the principles of the Treaty on the functioning of the European Union and the Agreement on the European Economic Area as soon as possible.

The different alternatives for such amendment are the following: (i) to unify the tax or; (ii) to modify the taxation links in the national legislation maintaining the legislative powers of the AC thus making applicable in all cases the legislation of an AC.

On those grounds, on September 30th, 2014 the Spanish Government proposed to the Parliament an amendment of the current wording of the Draft Bill for the Tax Reform of the Spanish Tax system in order to include an amendment in Spanish Law 29/1987 on Inheritance and Gift Tax. According to this proposal the method to bring Spanish Law in line with the ECJ ruling is the introduction of the following rules for the liquidation of the tax:

(i) In case of «mortis causa» acquisitions of assets the applicable links will be the following:

If the decedent was a resident of the EU or the EEA, the taxpayers will be allowed to apply the regulations of the AC in which the higher value of the Spanish assets and rights are located.

If the decedent was a resident of Spain, non-resident tax payers residing in an EU or an EEA country will be allowed to apply the regulations of the AC of residency of the decedent.

(ii) In case of donations involving Real Estate properties the applicable links will be the following:

For donations carried out by EU residents to Spanish tax resident individuals the regulations applicable will those in force in the AC in which the donee has his/her residency.

For donations of Real Estate properties located in a EU or an EEA country to Spanish resident taxpayers the applicable regulations will be those in force in the AC of residency of the donee.

(iii)  In case of moveable property acquisitions: the applicable regulations will be those in force in the AC in which the assets have been located a higher number of days during the previous 5-year-period.

(iv) In case of perceptions of amounts deriving from life insurance contracts EU residents may opt to apply the regulations of the AC in which the insurance company has its domicile or the regulations of the AC in which the contract with the foreign insurance company has been signed.

From a practical standpoint, and in the light of the above, amongst others, non-Spanish resident taxpayers, particularly EU residents who have been subject to the Spanish Inheritance Tax, must analyze the possibility of claiming the refund of the amounts paid in excess from the Tax Authorities. A number of proceedings may be applicable and a case-by-case analysis is required since amounts at stake may be relevant and may potentially include delay interest.

Please read original article here: ‘Spain: Court of Justice of European Union rules against the Spanish Inheritance and Gift Tax legislation’