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It establishes unjustified differences of treatment between residents and non-residents
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The design of the tax amounts to a restriction on the free movement of capital
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The Tax Authority says it is still too early to move forward with future actions
The Court of Justice of the European Union (EU) has ruled in a judgment that the inheritance and gift tax in Spain infringes EU law by establishing a difference in treatment between residents and non-residents when applying tax reductions.
The ruling orders Spain to pay costs and responds to an action brought against Spain in March 2012 by the European Commission (EC), which considered that certain aspects of the State legislation on gift and inheritance tax were incompatible with the Treaty on the Functioning of the EU as regards the free movement of persons and capital and with the Agreement on the European Economic Area.
The Court of Justice accepts Spain’s arguments regarding the free movement of persons, because the EC has not shown how Spanish legislation may affect that freedom, but confirms that it “constitutes a restriction on the free movement of capital”.
The Tax Authority analyses the judgment
Sources at the Ministry of Finance have told RTVE.es that they are “analysing the judgment” and that it is too early to move forward with future actions, although the possibility of requesting a technical report from the State Attorney’s Office is being considered.
Following the judgment, the president of the union of tax technicians (Gestha), Carlos Cruzado, told RTVE.es that the Ministry “has to take some decision” to adapt the legislation and that “the most reasonable thing would be to take the opportunity to amend the inheritance and gift tax law as a whole”.
He adds that competition between autonomous communities has led to “very high differences” between residents in different territories and that “new State regulation” should eliminate the discrimination, as the expert committee recommended in its report on tax reform.
Tax assigned to the Autonomous Communities
In Spain, the Inheritance and Gift Tax is a State tax, applicable throughout the national territory except in the Basque Country and Navarre, which have their own tax regime, but it is assigned to the Autonomous Communities, which may approve their own rules that complement or replace the State ones.
The rules of the Autonomous Communities may only affect elements of the tax settlement subsequent to the determination of the taxable base. The EC maintains that the regions may establish various tax reductions, which apply only where there is an exclusive connection with their territory.
Therefore, a succession or gift involving a person not resident in Spanish territory, or concerning real estate located outside Spanish territory, cannot benefit from those tax reductions. According to the Commission, this difference of treatment is contrary to the free movement of persons and capital.
Since all the communities have exercised their competence in this regard, the EC maintains that the tax burden borne by the taxpayer resident in them is considerably lower than that imposed by State legislation. The latter applies only in cases of real obligation to contribute (that arising from the acquisition of assets and rights) and in cases where the Autonomous Communities have no competence or have not exercised it.
According to the Commission, discrimination arises when the deceased or donor, or the heir or donee, are not resident in Spanish territory and in the case of gifts in which the real estate being transferred is located abroad, regardless of the place of residence of the taxpayer.
Restriction on the free movement of capital
The EU Court states that, “as it cannot enjoy the aforementioned tax benefits, the value of that succession or gift will be reduced” and that “such a reduction constitutes a restriction on the free movement of capital”.
It also recalls that measures that may deter non-residents from making investments in a Member State or from maintaining such investments are likewise prohibited, as contrary to the free movement of capital.
To be accepted, the difference in treatment must concern situations that are not objectively comparable or be justified by overriding reasons in the general interest. In the Spanish case, the Court considers that there is no difference between the objective situation of a resident and that of a non-resident that could support a difference in treatment; any difference in treatment relating to the reductions will give rise to discrimination.
The court does not accept Spain’s arguments concerning the pursuit of the legitimate aim of ensuring the effectiveness of tax controls and combating tax evasion within the European Economic Area, because it has not been shown how the lack of a mutual assistance agreement in this respect could justify the legislation challenged by the EC.