The Inheritance and Donations Tax in Spain after modification of Law 26/2014 to comply with the decision of the Court of Justice of the European Union 3/9/2014 (2023)

The Judgment issued by the Court of Justice of the European Union on 9/3/2014 (Case C-127/12) is very important for several reasons:

-because it puts an end to the discrimination of non-residents in the Inheritance and Gift Tax in Spain, who had been paying much more than the residents of some Autonomous Communities,

-because it has made it necessary to modify the current state regulations to avoid these differences,

-because it could also affect inheritances and donations with third countries (and not only from the EU and the EEA),

-and because it opens the way for those who have paid excessive taxes to request their refund.

This Judgment was issued in an appeal filed by the European Commission, which had been warning Spain for several years that its Inheritance and Donations Tax regulations violated Community Law by hindering the free movement of people and capital.

VERY IMPORTANT UPDATE: The Supreme Court Judgment No. 242/2018, of 2/19/2018 has clearly and forcefully rejected the DISCRIMINATION OF NON-COMMUNITY NATIONALS in the Inheritance and Donations Tax, as explained in the following post:ANOTHER VARAPALO OF THE SUPREME COURT TO THE LEGISLATOR FOR VIOLATING EU LAW, BY DISCRIMINATING NON-COMMUNITY NATIONALS WITH INHERITANCE TAX

IMPORTANT UPDATE DECEMBER 2018: Finally, the Treasury has assumed that it cannot discriminate against non-EU citizens with the Inheritance and Donations Tax, and the General Directorate of Taxes in Binding QueriesV3151-18 of 12/11/2018 (referring to Andorrans) and V3193-18, of 12/14/2018 (referring to Russians)fully assumes primacy of EU Law reaching the following CONCLUSIONS:

First:The Spanish legislation that regulates the Inheritance and Gift Tax is contrary to the regulations of the European Union, as long as it does not respect the principle of free movement of capital regulated in theArticle 63 of the Treatyof the Functioning of the European Union, which prohibits all restrictions on the movement of capital between Member States and between Member States and third countries.

Second:In accordance with the jurisprudence of the Supreme Court and in accordance with the jurisprudence of the CJEUon the scope of the principle of free movement of capital enshrined in article 63 of the Treaty on the Functioning of the European Union,the effects of the judgment of the TJUE of September 3, 2014, are applicable to residents in non-EU countries.

Third: Consequently,the exclusion of non-EEA third countries must not be taken into accountin relation to the scope of application of the second additional provision of Law 19/1987, of December 18, on Inheritance and Donations Tax. Therefore, the regime regulated in said additional provision will be applicable in relation to all non-residents, regardless of whether they reside in a Member State of the European Union or the European Economic Area or in a third country.

This is how the TAXATION OF INHERITANCES AND DONATIONS WITH NON-RESIDENTS (COMMUNITY AND EXTRA-COMMUNITY) remains AFTER THE JUDGMENTS OF THE SUPREME COURT OF FEBRUARY AND MARCH 2018 AND THE AFOREMENTIONED BINDING TAX INQUIRIES:

I.- WHAT DISCRIMINATION DOES THE STJUE END?

The Inheritance and Donations Tax is state, and for inheritances or donations between direct relatives it is paid applying a progressive rate of 7.65% to 34%.

However, for inheritances and donations between residents in Spain, the tax is ceded to the Autonomous Communities, which can introduce tax benefits applicable exclusively to their residents, which most of the CCAAs have done. Thus, for example, in the Balearic Islands, inheritances between resident direct family members are taxed at a maximum of 1%, and donations are 7%.

The problem was that when the heir, the donee or the deceased were non-residents, or it was a donation of property located abroad, the tax is not transferred to any Autonomous Community and had to be paid to the State and applying state regulations, without being able to apply any regional advantage.

This gave rise, for example, to the following cases of discrimination:

1.-Inheritance with a deceased resident in the Balearic Islands and with all their assets in Spain, corresponding 0.5 M to a son residing in Spain, who will pay €5,000 (1%) in the Balearic Islands and another 0.5 M to another resident son in Germany, which had to pay the State about 106,000 (approximately 21%).

2.-Inheritance with a deceased resident in Germany and with all the assets located there, 0.5 M corresponding to a child residing in Spain/Balearic Islands, who could not pay the 1% applicable in the Balearic Islands and had to pay the State about 106,000 (approximately twenty-one%).

3.-Inheritance with a deceased resident in the United Kingdom and with a property in Mallorca valued at 0.5 M, which was awarded to a non-resident spouse or child in Spain, who had to pay the State about 106,000 (approximately 21%).

4.-Donation from a father residing in Germany, who donated a property in Mallorca valued at 0.5 M to a child or a spouse also not residing in Spain, who had to pay the State about 106,000 (approximately 21%).

Well, the CJUE points out that in those inheritances and donations with non-residents, since they cannot benefit from regional tax reductions, a greater tax burden is borne than when only residents are involved, and that this causes a decrease in the value of the inheritance or of the donation.

The CJEU declares that state legislation, by allowing such differences in treatment, constitutes a restriction of the free movement of capital, prohibited by articles 63 TFEU and 40 of the EEA Agreement (made up of the EU countries and Norway, Iceland and Liechtenstein).

II.- WHAT HAS SPAIN DONE TO COMPLY WITH THE STJUE?

Having been sentenced, Spain was obliged to modify its legislation to avoid this discriminatory treatment in inheritances or donations with non-residents.

The most logical thing, given that there are also very important differences in the tax treatment of inheritances or donations between residents, depending on whether they reside in one Autonomous Community or another (which the CJEU does not question at all), would be to harmonize the Inheritance and Donations Tax throughout Spain to avoid large differences between Communities and between residents and non-residents.

However, this harmonization requires State agreements with the different CCAAs, which can be very complicated and take a long time.

For this reason, the legislator has chosen to comply with the ruling of the CJUE Judgment of 9/3/2014, rapidly modifying State Law 29/1987 regulating Inheritance and Donations Tax, without modifying the precepts of Law 22/2009 that regulate the assignment of the Tax to the Autonomous Communities and without forcing harmonization throughout Spain.

So,in Law 26/2014, of November 27(BOE 11/28/2014), which modifies the IRPF and the Non-Resident Income Tax, With entry into force on January 1, 2015, a third final provision is introducedthat alsomodifies Law 29/1987, allowing that in inheritances and donations with non-residents, for which the tax must be paid to the State Treasury, the advantages established in the CCAA with which there is some connection point can be applied.

With this modification, and in accordance with the provisions of Law 22/2009, inheritances and donations with non-residents will be taxed, in general, as reflected in the followingSCHEMES:

-There may be some peculiarity in inheritances and donations with residents of the Basque Country or Navarra, as well as in inheritances with residents of the only three States that have signed a Double Taxation Agreement with Spain on inheritance (France, Sweden and Greece).

-For these purposes, a person resident in Spain is considered to be resident in the territory of an Autonomous Community when they have stayed in its territory for a greater number of days than the immediately preceding 5 years. In any case, if he is a resident foreigner and without any other previous tax residence in Spain, there are arguments to defend that he can be considered a resident of an Autonomous Community even if he has not been residing there for more than two and a half years.

-Another novelty introduced in Law 29/1987 is thattaxpayers who must pay the Inheritance and Donations Tax to the State Treasury (Spain-State), at the AEAT National Tax Management Office (Madrid), must do so by SELF-ASSESSMENTwith the forms that will be approved for this purpose (in which the application of autonomous tax benefits will be foreseen). They will no longer have the possibility to request the administrative liquidation, which had been taking more than two years.

III.- DOES THE STJUE AFFECT INHERITANCES OR DONATIONS WITH THIRD COUNTRIES?

Although the legislator, in order to comply with the ruling of the CJUE Judgment of 9/3/2014, has limited the possibility of applying regional tax benefits to residents of the EU or EEA, we consider that the Judgment criteria could also be understood as applicable to inheritances and donations with residents in third countries, in which the deceased, the heir or the donee reside, or in which a property object of donation is located.

Indeed, the free movement of capital is the broadest of the freedoms enshrined in the TFEU, because in principle restrictions on the movement of capital are prohibited both between Member States and between Member States and third countries.

Community jurisprudence considers that inheritances and donations are capital movements for these purposes, and that any exception or limitation to the fundamental principle of free movement must be interpreted strictly.

In fact, the CJEU in Judgment 10/17/2013 (Case C-181/12) considered that this free movement violated the German regulations for granting worse tax treatment to an inheritance of property located in Germany with the deceased and heir residing in a country third party (Switzerland), and in the same Judgment of 9/3/14 the CJEU rejects the difference in treatment with respect to third party States in the EEA for the simple fact that there is no information exchange agreement with them.

For this reason, although the legislator does not allow regional tax benefits to be applied to inheritances or donations in which third countries come into play, we believe that there are good arguments to enforce their application before the Courts.

VERY IMPORTANT UPDATE: The Supreme Court Judgment No. 242/2018, of 2/19/2018 has clearly and forcefully rejected the DISCRIMINATION OF NON-COMMUNITY NATIONALS in the Inheritance and Donations Tax, as explained in the following post:ANOTHER VARAPALO OF THE SUPREME COURT TO THE LEGISLATOR FOR VIOLATING EU LAW, BY DISCRIMINATING NON-COMMUNITY NATIONALS WITH INHERITANCE TAX

IMPORTANT UPDATE DECEMBER 2018: Finally, the Treasury has assumed that it cannot discriminate against non-EU citizens with the Inheritance and Donations Tax, and the General Directorate of Taxes in Binding QueriesV3151-18 of 12/11/2018 (referring to Andorrans) and V3193-18, of 12/14/2018 (referring to Russians)fully assumes primacy of EU Law reaching the following CONCLUSIONS:

First:The Spanish legislation that regulates the Inheritance and Gift Tax is contrary to the regulations of the European Union, as long as it does not respect the principle of free movement of capital regulated in theArticle 63 of the Treatyof the Functioning of the European Union, which prohibits all restrictions on the movement of capital between Member States and between Member States and third countries.

Second:In accordance with the jurisprudence of the Supreme Court and in accordance with the jurisprudence of the CJEUon the scope of the principle of free movement of capital enshrined in article 63 of the Treaty on the Functioning of the European Union,the effects of the judgment of the TJUE of September 3, 2014, are applicable to residents in non-EU countries.

Third: Consequently,the exclusion of non-EEA third countries must not be taken into accountin relation to the scope of application of the second additional provision of Law 19/1987, of December 18, on Inheritance and Donations Tax. Therefore, the regime regulated in said additional provision will be applicable in relation to all non-residents, regardless of whether they reside in a Member State of the European Union or the European Economic Area or in a third country.

IV.- YOU CAN REQUEST REFUND OF EXCESSIVE TAXES

A key aspect of the STJUE of 3/9/14 is that its effects are not limited in time, so thosepeople who have already settled the tax on inheritances or donations with non-residents applying state regulations(up to 34% between direct family members) and without being able to apply the tax benefits of any "cheap" Autonomous Community (for example, the Balearic Islands, with a maximum of 1%) with which there is a connection point, they may request a refund of the amount paid in excess . For that they have two ways:

-request the rectification of the self-assessment and return of undue income, provided that the limitation period (4 years) has not elapsed,

-demand patrimonial responsibility to the State for having demanded taxes with tax regulations that do not comply with EU Law (term until3/9/201511/10/2015, one year from the publication of the Judgment in the Official Gazette of the EU).

The problem is that the STJUE has created a regulatory vacuum and in some cases it is not easy to determine which regulations to apply to calculate the tax paid in excess. Of course, if there is a point of connection such as those that the legislator will accept from now on in order to apply regional regulations, precisely to comply with the ruling of that Judgment, that will be the best argument to also apply them to inheritances and donations caused in the past. and thus quantify and request possible returns.

On the other hand, forInheritances and donations prior to the entry into force of the new regulations, with the tax pending payment, there are several possibilities (in addition to requesting an extension of another 6 months to save some time):

-The most conservative option would be to self-assess and pay the tax with state regulations and then request rectification and refund of improper income for the difference resulting from applying the regulations of an Autonomous Community with which there is a connection point.

-Another option would be not to self-assess and request the state Treasury for administrative liquidation (it has been taking several years), but alleging the STJUE and requesting the application of the corresponding regional tax benefits, and later appeal if the Treasury turns liquidation without taking them into account,

-Finally, you can self-assess before the state Treasury applying not only the state regulations, but also the regulations of the Autonomous Community with which there is a connection point provided for in the new regulations, although the Treasury could reject these calculations and make a provisional liquidation , which could be appealed.

CONCLUSION:

SaidBenjamin Franklin:"In this world there is nothing certain, except death and taxes."

The EU Court of Justice had to come to tell us how we have to combine both things in Spain, in inheritances and donations with non-residents.

In any case, we think that the most logical and probable thing is that in the medium term the tax will end up being harmonized throughout Spain, also avoiding the very important differences in taxation between residents of different CCAAs, whose constitutionality has already been questioned (Supreme Court Order of May 2013 that has raised a question of unconstitutionality in relation to Valencian regulations) and that after the CJEU Judgment 9/3/2014 will be questioned with even more grounds.

This harmonization could lead to increases in "cheap" CCAAs (Baleares, Madrid, etc.) and reductions in "expensive" CCAAs (Andalusia, Catalonia, etc.). In this sense, the Experts who advised the Government for the Fiscal Reform proposed that state regulations set maximum and minimum limits, within which the regional regulatory capacities could move. They proposed rates in the vicinity of 4-5% for transfers between direct family members, but in our opinion they will end up setting higher rates.

Palma, November 28, 2014

Alejandro del Campo Zafra

Lawyer-Tax Advisor

www.consultingdms.com

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