EU rules against Spain on discriminatory Inheritance tax applicable to non-residents
We have good news for all foreigners with properties in Spain as their future heirs will surely pay less tax and we have excellent news for non residents who inherited and paid tax in Spain over the last 4 years as they probably can claim back the Inheritance tax paid.
Some months ago, in the entry of our blog called “Is it possible to avoid Inheritance Tax in Spain” we advanced that the European Commission had started a lawsuit against Spanish discriminatory legislation with regard to Inheritance Tax.
As we mentioned at the time, regional regulations (applicable to residents in these regions) are much more beneficial to the taxpayer than the State regulations (applicable to non-residents) and that means a clear discrimination between European residents and non-residents. That is why the European Commission asked the Spanish Government in 2011 and 2012 to change the legislation to prevent discrimination. As the Spanish Government did nothing, the EC sued the Spanish State in the High Court of Justice of the European Union. The process had its hearing in Luxembourg in January 2014 and now finally there is a sentence.
Was it worth the wait? So far, YES.
On the 3 September 2014 the Highest European Court ruled against the Spanish State, as they also did at the time in relation to the Capital Gain Tax in the sale of property in Spain and with Inheritance Tax in Germany, and that implies that Spain will have to change the legislation so that there is no room for discrimination between residents and non-residents.
The Tribunal considers that, as the Commission denounced, the Spanish legislation for inheritance tax breaches Article 63 of the Treaty on the functioning of the European Union as well as Article 40 of the Agreement on the European Economic Area, as it allows the existence of different treatment to the taxation of inheritance and donations between residents and non residents in Spain that generates an extra cost for non residents European citizens that are therefore clearly discriminated.
It is convenient to mention here that the Inheritance and Donation Tax is a state tax that has been transferred to the Regional Governments, so that they can collect it and legislate about certain aspects of it. The regional governments permit the taxpayers to apply certain reductions, bonuses and exemptions that reduce the tax.
The sentence of the Tribunal does not specifically aim against the different legislation approved by the regional governments. The sentence, according to European Law, declares illegal the fact that non residents cannot take advantage of any bonuses, reductions and exemptions as they must be ruled in this subject by the national law and not by the regional law.
The discrimination alleged is not because of the existence of different taxation between the different regions. Likewise, there is no discrimination in the fact that the EU countries have also different taxation rules in the matter. According to the European High Court the discrimination occurs because the amount that a resident and a non resident have to pay in the same region and for the same taxable event differs.
Now the Spanish Government must legislate to comply with this sentence which will probably mean that non resident inheritors or those inheriting from a non resident in Spain will have to pay the same as residents inheriting from residents. And currently, in many of the regional Governments inheritors pay little or nothing thanks to the reductions, bonuses and exemptions that they enjoy.
The big question now is how the Spanish Government is going to achieve this without upsetting the Regional Governments and their approved laws. It is still to be seen if the Government will take in consideration the opinion of the committee of experts that recently issued a report about an upcoming comprehensive change to update the Spanish tax system. In that report experts advocated a change to match and harmonize the different regional laws in this regard, but that, as said, it might collide with the interest of the regional Governments and their capacity to regulate their own taxation rules in this field.
We believe that maintaining different inheritance taxation systems in each of the regional governments in the country might sooner or later collapse under the principles of equality and fairness.
In any case, regardless of the reform that must be eventually carried out by the Government, and that surely will mean a better scenario for the inheritance of the non residents, taxpayers who have paid Inheritance Tax and who believe they have been discriminated because of their residence, may legally claim the refund of what they have overpaid. The right to appeal for the refunding expires 4 years after payment was made.
Luis M. Vicente Burgos
VICENTE & OTAOLAURRUCHI ABOGADOS
