Spanish inheritance tax unfair to foreigners, rules EU court

A ruling by the European Court of Justice that Spanish inheritance tax breaks the law by charging more to foreigners, could lead to a change in Spanish property taxation, lawyers believe

The European Union’s highest court has ruled that Spanish inheritance tax breaks the law by charging foreigners more – and it could lead to a change in the real estate tax system, lawyers say.

The Court of Justice of the European Union (CJEU) has this Wednesday passed a judgement that Spanish Inheritance Tax violates European legislation when it imposes higher gift and inheritance taxes to foreigners and on foreign property.

Regional Spanish laws allow tax advantages in Autonomous Communities if the donor and beneficiary are Spanish resident taxpayers and the inherited property is in Spain.

The ruling has important implications, says Spanish solicitor Antonio Berdonces Vivancos, of Interlaw.

He tells OPP Connect, “Both central and regional governments will, unquestionably, have to review the regulations related to this tax (tax allowances, deductions and applicable tax rates) in order to comply with the judgement passed.

“It might just be that, in the short term, the reaction will be to remove this discrimination by eliminating all tax advantages for residents. This would represent an increase in tax yields but will not represent any advantage to the potential heirs who can benefit from this ruling.

“The most likely scenario, in the medium term, is that this judgment will call up for a thorough review of the current system which taxes the acquisition and ownership of real estate in Spain.

“These taxes are the main source of income for the Autonomous Communities (Regions) in Spain. Both taxes have a huge impact on the property market because the costs associated with purchasing a property include a tax that goes from 8% to 10 % for resale properties and 10% VAT plus Stamp duty at 1.5% for newly built properties.”

The court verdict supports a European Commission’s position complaint from 2011 that such tax discrimination was a restriction on free movement of capital.

In Spain, Inheritance Tax is a national levy whose handling and yields have been transferred to the Autonomous Communities. However, national law comes into account where there is no personal or material connection with an Autonomous Community – for example, if all heirs are not Spanish residents.

“Such discrimination occurred because there was a huge gap between the way beneficiaries residing in Spain, who practically paid nothing,  were taxed, and the tax rates non-residents had to face, which could be in the range of 15% to 40% of the value of property and assets,” says Mr Vivancos.

The Court of Justice states that the regulations do not affect free movement of persons, but they do affect free movement of capital.

The verdict highlights that in an inheritance or donation where there is an heir or donee, or a deceased or donor, who does not reside in Spain, or even a donation or state that is represented by real estate located outside Spain, “will not be entitled to tax advantages which are only applied if there is a connection with an Autonomous Community, and must therefore bear a higher tax burden compared to those inheritances or donations whereby the parties are all residents or which are only represented by real estate located in Spain”, the court states.

“This is a very important point because it also affects those inheritances which contain assets placed outside Spain but with the deceased having had his last tax residence in Spain. “

According to this verdict, such restriction is not justified because “there is no difference between the objective status of a resident and that of a non-resident that can sustain such a distinction in treatment, because the Spanish Inland Revenue regards them as tax payers when they are subject to Inheritance Tax for all the real estate located in Spain, regardless of where they reside,” says the court.

Where an owner has passed away with one property in Spain that heirs want to sell, the average tax burden, including Inheritance Tax and Transmission Tax can be 25%-35% or even more of the value of the property. “All of this without taking into account the increase of the value of the property which is taxed separately. This is a heavy burden on any transfer of property and does not at all help the recovery of the property market,” Mr Vivancos points out.

One option would be to reduce the tax on Inheritance and Transfer Tax but, in return, increase the annual IBI levy, which taxes real estate ownership and that is based on similar assessments throughout the country. “This would definitely have a positive impact on the international property market and will encourage sales.”

“As to the immediate effects this judgement can bring, and with reference to those tax payers who have paid taxes that might be subject to revision, it is obvious that many claims will be filed in order to recover amounts paid in excess. Those interested should start legal action at their earliest convenience.”

The Court of Justice interprets European Union law to make sure it is applied in the same way in all EU countries. It also settles legal disputes between EU governments and EU institutions.