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Sanction to the Kingdom of Spain for unequal treatment between Spanish residents and non-residents on the Inheritance and Gift Tax

Sanction to the Kingdom of Spain for unequal treatment between Spanish residents and non-residents on the Inheritance and Gift Tax

On the 3rd of September, the European Union Court of Justice delivered judgment on the infringement proceedings commenced by the European Union against the Kingdom of Spain. It stated that Spain had failed to comply with its obligations regarding the free movement of capital within the European Union and the European Economic Area in regards with the Inheritance and Gift Tax.

The Law on the Inheritance and Gift Tax establishes that each Spanish Autonomous Community can reduce the taxable base of this tax, something that several autonomous communities have indeed set up, thus significantly decreasing the taxable amounts.

In Madrid for instance, there is a 95% reduction for inter vivos acquisition of shareholdings, individual companies or family business, in favor of the spouse, descendants or adopted ones residing in Madrid.

However, if a successor or donee not residing in Spanish territory intervenes in the inheritance or gift, or they aim for a real state good situated outside of the Spanish territory, they will not benefit from those tax reductions, so the actual value of the inheritance or gift will considerably decrease.

This, under Article 63 of the Treaty on the Functioning of the European Union and Article 40 of the Agreement on the European Economic Area, violates the prohibition on all restrictions on movements of capital among member States and between member States and third countries.

This sentence has two main consequences:

  1. Spanish legislation on the Inheritance and Gift Tax will have to be changed so that the text is rectified where it is deemed discriminatory, and
  2. Taxpayers to whom the regulation judged to infringe the Treaty on the Functioning of the European Union and Agreement on the European Economic Area has been applied will be entitled to claim a refund of the income, pursuant to this new criterion confirmed by the EUCJ as discriminatory against the free movement of capitals.

The ways and means in which these consequences will be reflected might be diverse, but they are still today uncertain, even though the bases under which they will be carried out are already set up. Firstly, because it depends on the connection and approval criteria used by the legislator to eliminate the discriminatory differences and, secondly, because a quantifier criterion for the unjust deposit must exist before the taxpayer can make the payment request.

Nevertheless, in the meantime, it is strongly recommendable to submit a standard written communication to the Spanish Tax Authorities to claim the reimbursement of this amount, in order to avoid a possible statute of limitation for this taxpayer’s right.

By Mauricio Ticó

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