First published in Private Client Business, P.C.B. 2020, 1, 1-5.
It is certainly the case that Spanish tax law is evolving to keep up with European law, but not without a struggle. We appear to have reached a level playing field, whereby the liability of everyone to Spanish inheritance tax and Spanish gift tax is applied equally, irrespective of the country of origin, or the country of residence of the person liable to the tax. However, this has taken some 22 years to achieve.
The Spanish Constitution approved by the Spanish Cortes Generales on 31 October 19781 provided for the autonomy of 17 regions and two autonomous cities (Ceuta and Melilla in North Africa) that today constitute the Kingdom of Spain. The new politically decentralised State was developed during the years that followed. The construction of Spain as autonomous regions (el Estado Autonómico) was accompanied by a need to equip the autonomous communities with the legal tools and financial resources that would allow them to administer with sufficient budgetary control the authority that they had been granted.
It is against this backdrop that the Spanish State devolved to the autonomous communities the power to levy certain taxes, such as inheritance tax and gift tax. The intention was to equip all of those autonomous communities that wished to avail themselves of it with the capacity to make laws and recover amounts owing in respect of inheritance and gift tax, provided that such laws did not reduce any tax liability beyond minimums set in Law 19/1987 of 18 December 1987,2 the Spanish law regulating inheritance tax and gift tax.
Who bears the liability?
According to Spanish law, it is not the estate per se that bears the liability to inheritance tax, but instead the beneficiary of the assets of the deceased, whether the interest be a legacy, or a share of the residue. Any reductions in inheritance tax benefit individuals directly, whichever the country of residence of the beneficiary and notwithstanding that a part of the same estate may be administered in a common law jurisdiction where the taxation of estate assets is approached differently. It is also key to note that in Spain gift tax is never potentially exempt. Gift tax is payable, when there is a liability to gift tax, within 30 days of the gift having been received by the donee.
The power devolved to the autonomous communities
Notwithstanding that the jurisdiction to make laws and recover amounts due in respect of inheritance and gift tax had been devolved to the respective autonomous legislatures, they were not permitted to make any changes in respect of either the burden of the liability to inheritance and gift tax, or the chargeable amounts established in Law 19/1987. The power of the autonomous legislatures was limited to increasing the nil rate bands available to beneficiaries and donees and also to increasing the reduction of the total liability to tax, thereby reducing the tax liability even further than the minimums set out in Law 19/1987.
The vast majority of autonomous communities have either reduced the final charge to inheritance or gift tax by way of increased nil rate bands for each beneficiary or donee, or have decreased the amount chargeable to tax by way of a discount on the tax payable, particularly according to the degree of familial relationship of the beneficiary to the deceased, or of the donee to the donor. In some cases, a table is published providing detail of the total inheritance or gift tax payable, taking into consideration the reductions available. Often the autonomous tax rules have developed in an erratic fashion, due in great part to political pressure, changes often being effected immediately prior to political elections. Hence, those who would benefit from what are in some cases extremely generous tax reductions were those people residing in the autonomous community. These reductions did not apply to those liable to inheritance and gift tax who were not Spanish tax residents. Hence, the tax laws of the autonomous communities discriminated against those who were not resident in Spain and in favour of Spanish tax residents.
The results of the discriminatory tax rules
This discrimination produced some bizarre results, such that in the same Spanish estate one or more beneficiaries resident in Spain were not liable to tax at all, whereas other beneficiaries resident outside of Spanish territory were so liable. In financial terms the cost to those not resident in Spain was enormous over an extended period.
Further to an application made against Spain by the European Commission on 7 March 2012, the decision of the Court of Justice of the European Union (CJEU) dated 3 September 20143 held in favour of the Commission and provided that those not resident in Spain who were liable to inheritance tax and gift tax were being discriminated against as compared with those who were resident in Spain, as a result of the tax laws passed by the various autonomous legislatures.
The effect of the decision obliged Spain to amend the laws of the autonomous regions to put an end to the resulting discrimination. Hence, by way of secondary legislation (Disposición Final Tercera of the Law 26/20144) that came into force on 1 January 2015, Spain modified secondary legislation passed in 1987 (Disposición Adicional segunda of Law 19/1987) in relation to inheritance and gift tax, extending the application of the law to those not resident in Spain, but resident in other Member States of both the EU and the EEA.
Although the legislative solution implemented by Spain was exceptionally speedy, it was incomplete, as the new law continued to discriminate against those beneficiaries and donees resident in countries outside the EU and the EEA. Hence, these discriminatory rules continued to infringe EU rights.
Decision of the Spanish Supreme Court of 19 February 2018
It was merely a question of time before the Spanish Supreme Court was to have an opportunity to deliver a judgment in respect of this issue.
A number of residents of third countries who were adversely affected by the discriminatory rules appealed the unlawful imposition of inheritance and gift tax. They claimed damages against the Spanish State for the effect of the discriminatory rules and based their claim on the ground, inter alia, that the same rules also undermined the freedom of movement of capital, a principle equally applicable to third countries as to EU Member States. Some of those appeals finally reached the Spanish Supreme Court.
The decision of the Spanish Supreme Court of 19 February 20185 confirms what had already been set out by the majority of specialists in Spanish tax law and which in summary can be expressed as follows:
1) The decision of 3 September 2014 of the CJEU does not distinguish between those not resident in the EU, the EEA, and other third countries.
2) The principle of freedom of movement of capital, a right originating in the EU, is in force and applies to EU Member States and to the Member States of the EEA, as well as to third countries.
3) The imposition of inheritance and gift tax is not affected by any of the restrictions established by art.63 of the Treaty on the Functioning of the European Union (TFEU)6 in relation to the free movement of capital, whether between EU Member States, or in respect of third countries.
4) Residents of third countries not being EU or EEA Member States have a right to the same fiscal treatment in respect of Spanish inheritance and gift tax as those who are resident in the EU and the EEA, including those resident in Spain.
Hence, in its decision of February 2018 the Spanish Supreme Court made clear that the modification of the secondary legislation of 1987 introduced as a direct result of the decision of the CJEU of September 2014 was insufficient. The Spanish Supreme Court has maintained its position in that regard in various subsequent decisions in March, April and May of 2018.
Response of the Spanish Treasury
Within its broad remit the Dirección General de Tributos (DGT) is responsible for the enforcement of tax policy in Spain and is a governing body of the Secretariat of the Spanish Treasury. We can highlight among its multiple functions its responsibility to interpret tax laws, by providing binding responses to specific requests that can be made by anyone who wishes to query the interpretation or effect of rules of a fiscal nature as they relate to a specific question. The identity of the person raising the query must be disclosed. The response of the DGT to the query is binding not only in respect of the question at hand, but in respect of all other matters that fall within the ambit of the response.
In a surprising and unusual way and without waiting for the adoption by Spain of the necessary corrective legislative measures, in its response to the request for a specific response (”resolución vinculante”) no.V3151-18 of 11 December 20187 the DGT endorsed the jurisprudential doctrine of the Spanish Supreme Court that ends the discriminatory treatment that is diametrically opposed to the EU rights set out above.
It would have been far more characteristic of the DGT to have waited for the Spanish government to have derogated from and modified the unlawful rule before formally recognising a change in the law, than to have accepted of its own volition that the rule violated EU law.
The response of the DGT is of great relevance, because it shows that the Spanish Treasury itself accepts the position of the Supreme Court and that it disapplies a Spanish norm that has the force of law.
The DGT reaches the following conclusions:
1) The Spanish rules governing the imposition of inheritance tax and gift tax are contrary to EU law, as they do not respect the principle of freedom of movement of capital regulated by art.63 of TFEU, which prohibits all restrictions on movements of capital between Member States and between Member States and third countries.
2) In accordance with the jurisprudence of the Spanish Supreme Court and in line with the jurisprudence of the CJEU, the effects of the judgment of the CJEU of 3 September 2014 are applicable to residents of non-EU countries, as well as residents in the EU and the EEA.
3) The regime regulated by Law 19/1987 on inheritance tax and gift tax is applicable in relation to all non-residents, regardless of whether they reside in an EU Member State, or in any third country.
Procedure for overpayment of tax
Further to all of the above, any beneficiary of a Spanish estate, or any recipient of a gift in Spain, resident in a country outside the EU and the EEA, who in the previous four years has made a payment of either inheritance tax or gift tax in Spain without benefiting from the reductions and increased nil rate bands available because of his or her country of residence, will be able to make a successful claim against the Spanish Tax Agency (Agencia Tributoria Española) for the return of the funds improperly paid, by way of an administrative procedure designed for that purpose. Upon receipt of the application for the return of funds the Spanish Tax Agency is bound to return any overpayment of tax with interest. Another question is as to the speed with which the funds will be returned. Patience is necessary, but the funds will be forthcoming eventually, with interest.
In general terms, the limitation period for an application for the return of funds improperly paid is four years from the date of improper payment of the tax. Notwithstanding that, even in those cases in which the four-year period has elapsed it remains possible to claim the amount paid by way of a claim for damages in administrative proceedings brought directly against the Spanish Tax Agency. In fact, the Spanish Supreme Court judgment of 19 February 2018, considered in this article, derives from an administrative procedure of this precise type.
There is very persuasive legal authority based on a decision of the Spanish Constitutional Court of 2 July 20128 that supports the retrospective application of decisions of the European Court of Justice, such that the effects of a decision of the CJEU apply from the moment the national law held unlawful comes into force and not from the date of the decision of the CJEU. Hence, once the limitation period of four years has passed, thus barring an administrative remedy, an ordinary claim may be made, so that applications made invoking the direct effect of the decision of the CJEU of 3 September 2014 cannot be interpreted restrictively by the Spanish tax agency.
Inheritance and gift tax in Andalucía, Catalunya and Madrid
Here are some simple examples of the extent to which liability to inheritance tax and gift tax is reduced in different autonomous communities in Spain, included to avoid the subject matter of this article from being entirely abstract. At the time of writing, in Andalucía each child and/or a spouse can inherit up to €1 million without incurring liability to inheritance tax. The same tax-free amount applies to gifts in Andalucía. In Madrid, each child and/or a spouse is entitled to a reduction of 99 per cent of the total liability to inheritance tax. Finally, in Catalunya, inheritance tax is payable on a sliding scale by a spouse and/or each child, so that in respect of the first €700,000 received by a child or a spouse a tax of 1 per cent of that amount is payable by each beneficiary. In respect of a total inheritance of €1 million per beneficiary (being a child or a spouse) in Catalunya, the tax payable by each beneficiary is €31,000 (children of less than 21 years of age benefit from a greater reduction). There are lesser reductions available for other family members.
The investment of UK nationals in Spanish property outstrips by far the extent to which citizens of any other state have invested and continue to invest in the Spanish real estate market. The extension of the reductions in inheritance and gift tax payable by people not residing in the EU or the EEA may become extremely relevant, it seems, given the UK’s impending exit from the EU.
All of the consequences of a fiscal nature that Brexit may produce for all of those British citizens who own property and other rights in Spain either now or in the future are still to be determined. However, what is clear is that the exit of the UK from the EU will not entail a higher fiscal cost for those UK nationals who are beneficiaries of Spanish assets or recipients of gifts in Spain, as wherever they reside their tax burden will be the same as that of a Spanish resident. A very obvious conclusion perhaps, but arguably one that may have been achieved sooner.
1 https://www.boe.es/diario_boe/txt.php?id=BOE-A-1978-31229 [Accessed 3 December 2019].
2 https://www.boe.es/buscar/act.php?id=BOE-A-1987-28141 [Accessed 3 December 2019].
3 Comisión Europea v Reino de España (C-127/12) EU:C:2014:2130; http://curia.europa.eu/juris/document/document.jsf?text=&docid=157285&pageIndex=0&doclang=ES&mode=lst&dir=&occ=first&part=1&cid=3335349 [Accessed 3 December 2019].
4 https://www.boe.es/diario_boe/txt.php?id=BOE-A-2014-12327 [Accessed 3 December 2019].
5 Pina 242/2008, https://supremo.vlex.es/vid/704676825 [Accessed 3 December 2019].
6 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12012E%2FTXT [Accessed 3 December 2019].
7 https://petete.minhafp.gob.es/consultas/?num_consulta=V3151-18 [Accessed 3 December 2019].
8 145/2012, ES:TC:2012:145, http://hj.tribunalconstitucional.es/es-ES/Resolucion/Show/23001 [Accessed 3 December 2019].