The Spanish Supreme Court rules that Spanish Inheritance and Gift Tax rules discriminate against non-EU residents and, therefore, infringe EU principles

Published on 23rd Apr 2018

The Spanish Supreme Court has confirmed that the European Court of Justice ruling dated 3 September 2014, which considered in relation to Spanish Inheritance and Gift Tax rules that Spain was in breach of the freedom of movement of capital enshrined in article 63 of the TFEU, should apply not only to EU residents but also to residents in third countries. For these purposes, the tax treatment of both EU and non-EU residents should therefore be equated to that of Spanish residents.

The European Court of Justice ("ECJ") ruling dated 3 September 2014 ("Case C-127/12") considered that Spanish rules were contrary to the free movement of capital and, as such, infringed article 63 of the TFEU, insofar as such rules provided for different treatments for resident and non-resident taxpayers for Inheritance and Gift Tax ("IGT") purposes (see our Newsletter from 1st of October 2014).

Initially, this ruling was construed in Spain as affecting only situations where discrimination was considered to involve a non-Spanish taxpayer resident in another EU Member State. Residents in third countries were therefore out of the scope of this ECJ ruling. In fact, the reform to Spanish IGT rules, which took effect as from 1 January 2015 and included a supplementary provision (Disposición Adicional Segunda) in the IGT Act, addressed only residents in Spain and in the EU but not resident in third countries.

However, the Spanish Supreme Court in a ruling dated 19th of February 2018 (num. 62/2017), and in other subsequent rulings dated 21 March 2018 (num. 488/2018) and 22 March 2018 (num. 493/2018), has reconsidered the interpretation given to this ECJ ruling, holding that its effects should also extend to non-EU residents. The ruling concludes that Spanish law contravenes EU rules and that the free movement of capital may also be hindered in cases involving third countries and not only EU Member States.

It is worth noting that Spanish Autonomous Regions have partially assumed legislation capacities with respect to this tax. Therefore, rules specific to each Autonomous Region will apply alongside central state rules. The resulting situations may be so diverse as to lead to considerable territorial grievances. In Autonomous Regions such as Aragon, an inheritance from parents directly to their children may be taxed at a marginal 40.4% rate, whereas the same inheritance in Madrid, the Basque Country or Navarre may be practically untaxed.

The Supreme Court ruling allows a non-EU-resident to receive the same treatment as Spanish and residents, so that such taxpayer may opt for the same tax regime. Depending on the circumstances in each case, the financial consequences of this ruling for a non-EU resident may be very significant.

For example, in the case of an inheritance where the testator is a Madrid resident, his or her heir resides in a non-EU country and the inheritance includes assets located in Spain, the heir would be subject to tax as follows (in accordance to current rules):


Testator: resident in Madrid

Heir: desdendant older than 21 years, non-Spanish resident

Inheritance including real estate located in Madrid valued at 1,000,000€

Heir's pre-existing net assets below 402,678€

Heir resident in an EU Member State Heir not resident in the EU
Real estate value 1,000,000.00 1,000,000.00
Dowry 30,000.00 30,000.00
Taxable base 1,030,000.00 1,030,000.00
Kinship reduction -15,956.87 -15,956.87
Net taxable base 1,014,043.13 1,014,043.13
Initial tax liability 268,122.67 268,122.67
Madrid region allowance -265,441.45
Tax due 2,681.23 268,122.67
Difference  265,445.45

The Spanish Supreme Court precedent would allow taxpayers to recover the above difference. Therefore, previous IGT returns involving non-EU residents should be reviewed, in order to determine whether there are such taxation differences and whether it is worth initiating refund procedures to claim back these differences together with late payment interest.

Moreover, it would be reasonable to expect an amendment to the Spanish IGT Act sooner rather than later. Until such amendment, taxpayers should consider whether to calculate their IGT liability, which may be affected by this ruling, in accordance with current rules (the Spanish Supreme Court ruling does not annul the corresponding IGT provisions) and subsequently apply for a tax return rectifications and a refund or whether to directly apply the Spanish Supreme Court precedent and not pay the difference, taking into account the possible consequences in each case.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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