04 Oct Spanish Supreme Court Ends Tax Discrimination in Inheritance and Gift Tax
The Supreme Court’s judgement of 19 February 2018 has ruled that Inheritance and Donations Tax is inconsistent with European Union law. Furthermore, it establishes a different tax treatment for residents inside and outside the European Union and the European Economic Area taxpayers. This ruling is based on a previous judgement of the European Court of Justice in 2014, which already established that Spanish Inheritance and Donations Tax was contrary to European principles and regulations, as it established a different tax treatment to Spanish residents and the rest of residents within the European Union and the European Economic Area.
In its judgement of 19 February 2018, the Supreme Court established that the provisions relating to Inheritance and Donations Tax, according to which taxpayers resident in non-EU countries (i.e. residents outside the European Union (EU) and the European Economic Area (EEA)) are subject to differentiated tax treatment from other taxpayers, are contrary to EU legislation.
This tax discrimination has its origin on the different legislation there is on Inheritance and Donations Taxes in the Spanish territory. In this sense, many Autonomous Communities have approved important tax benefits – even reaching tax reductions of 99%-. In order to apply these reductions, it was still required that at least the taxpayer had its tax residence in the EEA. If that was not the case, the regulation contemplated by the Autonomous Communities was not applied, and so, the state regulation, that has a much more burdensome regulation than the autonomic one, was applied.
Already in 2014, the European Court of Justice in its judgement of 3 September 2014 (C-127/12) considered the Spanish legislation which, in general, only allowed the application of regional tax relief to residents of the national territory (including the testator), discriminatory. Moreover, such relief could not be applied to residents of the EU or EEA, because they were obliged to apply Spanish State legislation. The consequence of that ruling was that the Spanish State had to amend the rules that governed Inheritance and Donation Taxes to allow all residents (including the taxpayers) of the EU and the EEA, to benefit form the tax incentives provided in the respective Autonomous Communities, provided that they had some point of connection with the territory. Despite the fact that since the Maastricht Treaty of 1994 the effects of the free movement of capital also extend to non-EU and non-EEA residents, this new legislation did not consider them.
The Supreme Court has based the present judgment on the same principle the Court of Justice of the European Union used in its judgment of 2014, i.e. the fundamental principle of the European Union on free movement of capital. This way, the Supreme Court recognises the right of non-EU and non-EEA taxpayers to benefit from the regional reliefs.
The case under trial concerned the refund of the amount payed in excess on Inheritance and Donations Taxes to a taxpayer, who was resident in Canada, and had been prevented from the relief contemplated in the Inheritance Tax credits of the Autonomous Communities. This decision is based, among other arguments, on another case dealt with by the European Union Court of Justice. In such case, the Court declared that the tax regime of the German Inheritance Law (European Court of Justice 2013, c-181/12) was discriminatory against tax residents in Switzerland, since it provided different tax benefits depending on the place of residence of the subjects involved in the inheritance.
Consequences of the Judgement
The most obvious consequence is that the Spanish State will have to re-adapt its Inheritance and Donations Tax regulations to bring them into line with the ruling. It is important to mention that in 2017, the European Commission opened an investigation on the possible restriction on the free movement of capital in these cases. Such investigation procedure may conclude with the opening of an infringement procedure against Spain, if the Spanish legislator continues to delay the required legislative amendment.
On the other hand, since there is no longer a difference in the tax treatment given to residents in Spain and residents within the outside of the EU and the EEA, the rules on Inheritance and Donations Tax apply equally to everyone. This way, everyone can benefit from the tax deductions established by the Autonomous Communities, when the general requirements established in this respect are met.
Finally, this judgement also opens a possible way for non-EU and EEA taxpayers who have already paid the tax to claim the refund of the amounts unduly paid, together with the interest accrued or to raise a claim for State patrimonial liability. Each specific case would have to be analysed to see if there is a possibility of claiming and by what means.