Spain ends discrimination against non-EEA citizens re inheritance tax and gift tax
The jurisprudence of the Court of Justice of the European Union and of the Tribunal Supremo (the Spanish Supreme Court) has put an end to discrimination against non-EU citizens who were not entitle to the tax allowances against inheritance tax granted by the Autonomous Communities. At the same time, the Supreme Court has established the possibility that the heirs can claim state and regional tax benefits in Inheritance and Gifts Tax for Assets located outside the EU.
Inheritance and Gift Tax
The Spanish inheritance and gift tax (impuesto de sucesiones y donaciones) is due when one receives an inheritance, a gift or a payment by an insurance company. Unlike in other countries, it is the beneficiary who pays the tax on assets received upon death, on lifetime gifts and on inherited pension funds.
Although national rules apply across the country, the Inheritance and Gift Tax Act (Ley 29/1987 del Impuesto sobre Sucesiones y Donaciones) establishes a common platform to regulate inheritance and gift tax. However, each autonomous region (Comunidad Autonoma) can modify applicable tax rates and reliefs for their own territories. The inheritance tax and the gift tax differ by region, in some cases quite substantially.
Tax Rates and allowances
Spanish inheritance and gift tax rates as set by the national government are progressive and fall within the following brackets, based on value of the inheritance or gift received:
€7,993 – 31,956 : 7.65 to 10.2%
€31,956–79,881 : 10.2 to 15.3%
€79,881–239,389 : 15.3 to 21.25%
€239,389–398,778 : 25.5%
€398,778–797,555 : 29.75%
€797,555 - : 34%
Inheritance tax allowances and reliefs differ depending on the heir’s relationship with the deceased. Beneficiaries fall into four groups when it comes to inheritance tax in Spain:
• Group I: children (natural and adopted) under 21 get an allowance of €47,859.
• Group II: children (natural and adopted) over 21, grandchildren, spouses, and parents/grandparents (including adoptive) get an allowance of €15,957. Some regions recognize unmarried partners registered under a pareja de hecho (domestic partnership).
• Group III: siblings, aunts, uncles, nieces, nephews, in-laws, and their ascendants/descendants get an allowance of €7,993.
• Group IV: cousins, all other relatives, unmarried partners (unless the region allows it) and those who are unrelated get no allowance.
Those with disabilities receive an allowance of either €47,859 or €50,253, depending on the extent of the disability.
Each Spanish region may increase the allowances for these groups. E.g., Andalucía, Cataluña, Madrid, and Valencia, all give significant inheritance tax reductions for spouses and children (some give an allowance or bonificación of 99%).
Discrimination against non-residents
Until 2015, the regional tax benefits were refused when the testator was not resident in Spain, or when the heir or the beneficiary of the gift was not a Spanish resident.
The decision of the European Court of Justice of 3 September 2014 (C-127/12) confirmed that this was a discrimination against non-residents and assets outside the country.
By applying different tax treatment to donations and successions between beneficiaries and donees resident in Spain and those not resident in Spain, between bequeathers resident in Spain and those not resident in Spain, and between donations and similar transfers of immovable property situated within and outside of Spain, the Kingdom of Spain has failed to fulfil its obligations under Article 63 TFEU and Article 40 of the Agreement on the European Economic Area of 2 May 1992;
The Inheritance and Gift Tax Act was adapted to extend the regional allowances to EU citizens and to assets in EU Member States. However, non-EU citizens and assets in third countries were still excluded, and this led to an infinite number of lawsuits demanding the State's liability.
Discrimination against non-EU citizens
In a decision of 19 November 2020, the Supreme Court (6314/2018), has put a final end to this controversy.
The case related to a French testator, who was resident in Venezuela and who had never had residence in Spain. He owned a property in Madrid and three properties in Alicante which were let. His heirs were his three daughters, who had French citizenship and were resident in Venezuela and in Colombia. Because they were not resident in the EU, the national tax rules were applied and the regulations of the Autonomous Community were not, while the Communities of Madrid and Valencia provide for a reduction of the inheritance tax of 99%.
Non-EU citizens are also entitled to the application of regional tax benefits
The Supreme Court comes to the conclusion that in the case of an inheritance or gift involving an heir or donee or a decedent who is not resident in Spain, or in the case of an inheritance or gift involving immovable property located outside Spain, when in these cases the heirs or donees cannot benefit from the autonomous tax benefits, this entails a decrease in the value of an inheritance or gift.
Therefore, the application of State legislation entails a difference in treatment based on residence, which discriminates between taxable persons who are in a comparable situation, which would constitute a restriction on the free movement of capital.
Non-EU citizens are also entitled to the application of the tax benefits of the Autonomous Communities and that the rules of the Autonomous Communities also apply to assets in third countries.
Therefore, the tax situation of non-EU taxpayers would be as follows:
- The taxpayer is resident outside the EU: EU and non-EU citizens should be eligible for regional tax benefits. The rules of the Autonomous Community where most of the assets are located and, if none of the assets are located in Spain, the rules of the Autonomous Community in which the successor is resident.
- The deceased was residing in an Autonomous Community: non-EU heirs should benefit from the Autonomous Community rules. This was already confirmed in the Binding Consultation of 24 June 2019 (V1517-19) of the Dirección General de Tributos
- Gifts of immovable property located in Spain: non-EU recipients shall be entitled to the application of the rules of the Autonomous Community where the property is located.
- Gifts of immovable property located in a third country: Spanish residents must be entitled to the application of the rules of the Autonomous Community where they reside.
- Gifts of movable assets located in Spain: recipients outside the EU should be entitled to the application of the rules of the Autonomous Community where they have been located for the greatest number of days during the last five years.
The rules of the Autonomous Communities will also apply to assets in third countries
Nonetheless, in its decisions of 16 October 2018, case 7330/2016, and of 20 September 2018, case 1368/2017, the Central Economic Administrative Court has pointed out that the Second Additional Provision of the Inheritance Tax allows taxpayers (to whom the State inheritance tax regulations are applicable) to opt for the Autonomous Community regulations in accordance with the rules in that Provision. This is an option provided for by Article 119 of the General Tax Law, and the taxpayer can opt for either the State or the Autonomous Community legislation during the voluntary filing period. If the taxpayer has filed the self-assessment and applied the State legislation, he cannot opt for the Autonomous Community legislation after the voluntary filing period.
On the other hand, the administrative practice of the National Tax Administration Office of the State Tax Administration Agency has considered self-assessments submitted by non-EU taxpayers to be in accordance with the law, even if they have applied the rules of the Autonomous Community and in accordance with the corresponding point of connection, even proceeding to refund what was unduly paid by application of the State rules. In this regard, the Binding Consultation of the Dirección General de Tributos of 11 December 2018 (V3151/2018) recognises that discrimination against non-EU citizens infringes the free movement of capital, so that the Second Additional Provision of the Inheritance and Gift Tax Act also applies to all non-residents, whether reside within or outside the European Economic Area.
Both non-resident and non-EEA taxpayers must file the corresponding self-assessments applying the regional regulations. If they have already filed, they may recover what has been unduly paid by applying the State regulations through the corresponding procedure (request for rectification of the self-assessment, revocation, nullity as of right, or by requesting the State's financial liability) even if they are time-barred.