Spain discriminates against foreigners in the Inheritance Tax

The distribution of powers between the Spanish central State and its Autonomous Communities regarding the regulation of the Inheritance Tax allows these regions to develop tax exemptions not covered by the State law, where only the defining elements of tribute are regulated. This, being discriminatory for Spaniards because of their residence and thus supposing a breach to the principle of equality, has attracted the attention of the Spanish Supreme Court, which in its Order of May 8th of 2013 raised for this reason the question of unconstitutionality against Valencia’s Law on Inheritance Tax.

While we were waiting for the Spanish Constitutional Court to rule on this matter, a new front was opened against this situation, this time at the European Community level. What was at stake here was not equality of citizens, but the freedom of movement for people and capital, one of the fundamental principles of the European Union. Consequently, on September 3rd of 2014 Spain lost its lawsuit promoted by the European Community before the Court of Justice of the European Union (CJEU), which ruled that the requirements are met in order to nullify the situation caused by the different regulations in the Spanish tax system.

However, the outcome is that there are still stark differences in the tax treatment of gifts and legacies between deceased residents of Spain and non-residents. Thus, the inheritances caused by deceased residents (the ones living in Spain during the last 5 years), where applicable, shall be eligible for bonuses of up to 99% on tax liability, whilst the ones caused by non-residents won’t be able to get these allowances. Therefore, since every inheritance including real estate in Spain must be taxed according to Spanish laws, any heirs that live abroad will be liable to pay the Spanish Inheritance Tax without being entitled to any substantial tax credit, insofar as their deceased relative didn’t have a permanent residence in Spain over the last 5 years.

Given such a huge gap, although the ruling of the CJEU has been unfavorable to Spain, non-residents will most likely have to take the Spanish Administration to court if they want their rights to prevail and expect to obtain a refund.

There are already other CJEU rulings that have invalidated situations similar to the Spanish one, as in the case of Germany. The ruling concerning Spain could be invoked against non prescribed settlements (the ones timely filed within the last 4 years), which would be reviewed by a Spanish Tribunal in the light of European law, applying retroactively the most favorable norm to non-resident taxpayers that have been disadvantaged. This pathway, however, may only be undertaken when the taxpayers are EU citizens.

We recommend you to submit your settlements of the Spanish Inheritance Tax to the review of a tax expert in order to check whether they are likely to benefit from tax reductions that have not been taken into account, or that have been denied, particularly if the taxpayers involved were EU citizens non-residents in the Spanish territory.

In PLACITUM we are at your disposal to answer any question on this matter and any others regarding international tax planning.

CONSULTANCY AREA