Spanish Inheritance and Gift Tax infringes European Community Law

Written on 1 Oct 2014

On 3 September 2014, the European Court of Justice ruled against (C-127/12) the Inheritance and Gift Tax in Spain (IGT). Said tax discriminates against non-EU or European Economic Area (EEA) tax paying residents and, as a result, does not comply with the Treaty on the Functioning of the European Union (TFUE).

The ruling from the European Court of Justice (ECJ) declared that Spanish laws were not complying with the provision contained in Article 63 of the TFUE regarding the prohibition on the restriction of the movement of capital between member states and between member states and third countries.

In particular, the ruling establishes that the Spanish legislation which regulates the IGT (Act 29/87) violates Article 63 as it burdens non-residents in Spain with a greater inheritance or gift tax, which causes a reduction in the inheritance or gift, in short, it is a discriminatory treatment and it restricts the free movement of capital.

With this in mind, situations affected by the ruling on inheritance or gift will be those in which: (i) the deceased person or donor is a resident in Spain and the recipient [is] a resident in an EU/EEA member state or third state/country, (ii) the recipient is a resident in Spain and the donor is a resident in an EU member state or third state/country and (iii) donor and recipient are residents in an EU member state or third state/country in relation to assets subject to the IGT.

Accordingly, this ruling could be especially relevant in those cases in which non-residents in Spain pay higher taxes compared to taxes paid by residents, as certain tax cuts are not applied to a paid/settled inheritance or gift involving non-residents.

Therefore, in such cases in which the IGT has been settled with a non-resident, based on the mentioned ruling, it would be feasible to request a refund of any undue payments if the statute of limitations period has not elapsed since making such a payment (4 years). If the period has elapsed those affected would have the possibility of demanding responsibility from the State and request compensation for any damages deriving from the payment of taxes regulated by laws contrary to EU law.

In view of the ruling, the Popular Party, taking advantage of the undergoing tax reform, has presented an amendment to modify the internal regulation in order to adapt the IGT to the TFUE, thus eliminating the discriminatory treatment by reason of residency.

The Tax Department at Osborne Clarke is at your disposal to evaluate each specific case in order to appropriately consider any requests for refunds of undue payments or, where relevant, analyse the possible financial liability of the State.