A set of sentences issued by the Spanish Supreme Court in the first half of 2018 (STS242/2018, STS488/2018 and STS492/2018) paves the way for non-EU/EEA residents to obtain access to regional benefits in the case of a succession or donation involving assets located on Spanish territory, or assets abroad transferred to a Spanish resident.
Background
Looking back over the years, Law No. 22/2009 partially transferred legislative powers concerning Inheritance and Gift tax to the Spanish regions. Unlike federal rules, most Spanish regions provide for important reductions to free transfers between close relatives (mainly spouses, ascendants and descendants). These benefits were historically denied to donations and inheritances involving cross-border elements (assets located in Spain inherited by non-residents and/or assets abroad inherited by a Spanish resident).
This situation was appealed at the European Court of Justice (ECJ), which ruled against the Spanish Inheritance and Gift tax legislation (Law No. 22/2009) on 3 September 2014. The Court specifically argued that Spanish legislation constitutes an obstacle to free movement of persons and capital, in breach of Article 63 of the Treaty on the Functioning of the European Union (TFEU) and the Agreement on the European Economic Area. Shortly after, Law No. 22/2009 was amended to comply with the aforementioned ECJ judgment. The modification was implemented by means of Law No. 26/2014, having effect as of 1 January 2015, and enabled EU/EEA residents to benefit from Spanish regional regulations for donations and inheritance. However, the Spanish legislator interpreted the ECJ judgment restrictively, so that successions and gifts involving cross-border elements outside the EU/EEA could not benefit from the regional regulations. Consequently, in those cases the federal law for inheritance and gift tax still had to be applied, which in most cases is less favourable to the taxpayer.
Judgments recently issued by the Spanish Supreme Court
The judgments issued by the Spanish Supreme Court in the first half of 2018 have stated, clearly and firmly, that Law No. 22/2009 must not, in any way, differentiate between residents inside and outside the EU/EEA when granting the benefits laid down in the regional regulations applicable to inheritance and gift tax. Furthermore, those judgments sentence the Spanish government to reimburse the claimants on taxes paid in excess of what they would have had to pay if they had access to the regional regulations.
The Supreme Court makes it very clear that the ECJ decision of 3 September 2014 also protects non-EU/EEA residents from any infringement to the free movement of capital, and consequently, that the current Spanish law, which sets out the rules to determine which law is applicable to a specific succession or donation, is contrary to the EU regulations. Furthermore, the Spanish Supreme Court considers that the violation of the EU-legal frame is adequately characterised in the present case, namely it is manifest and severe, otherwise it would not have sentenced the Federal State to pay compensation to claimants.
Therefore, we expect that in the short to medium term the Spanish Inheritance and Gift tax legislation will finally be modified, so that the rules for the application of regional benefits in cross-border donation and succession cases are applicable regardless of the jurisdictions involved. In the meantime, due to the binding decisions from the Supreme Court, we strongly believe actions should already be taken by heirs and donees involved in cross-border estates and donations having non-EU/EEA elements.
What now?
Taxpayers (donees or heirs) who filed and settled Spanish Inheritance/Gift tax on the basis of Spanish federal rules which are not yet covered by the Spanish statute of limitations (generally speaking, returns filed in the past 4-5 years) are now entitled to appeal against the return filed at the time. Therefore, they can request the application of the regional benefits that would have corresponded to them, and also claim the refund of the amount paid in excess due to the new assessment that includes the regional benefits, which are now granted by the new jurisprudence of the Supreme Court.
Furthermore, although the law determining which rule is applicable to inheritances or donations has not yet been modified to comply with the new jurisprudence issued this year, we recommend that heirs involved in future estates with elements outside the EU/EEA assess their Spanish inheritance tax following the regional rules, in case they are more advantageous than federal ones. For the moment, the National Tax Office in charge of inheritance tax for non-residents is raising objections to forms submitted this way, but it is possible to force the tax offices to accept this kind of submission. The jurisprudence of the Supreme Court should be observed by a tax authority, so we deem it unlikely that a reassessment note applying federal rules to inheritance tax returns filed in this way will be obtained. However, in the event that this does occur, an appeal against the reassessment note should result in a favourable resolution from the corresponding court, although in this case, tax liability resulting from a reassessment note will have to be settled or guaranteed before appealing the tax authority’s decision.
A less aggressive strategy for estates with non-EU/EEA elements that may occur in the near future would be to submit an inheritance tax form following the federal rules, and consequently, to pay the higher liability resulting thereof. Then, proceed to amend the assessment of inheritance tax filed, requesting the application of regional rules and the refund of tax paid in excess following the jurisprudence of the Spanish Supreme Court. In this case, we also consider an adverse decision from the tax authority unlikely due to the new jurisprudence issued by the Supreme Court. However, if this does happen, we firmly believe that the taxpayer will receive a favourable resolution from the courts.
Conclusion
As long as Law No. 22/2009, the object of this controversy, is not modified in accordance with the new jurisprudence of the Spanish Supreme Court, estates and donations with non-EU/EEA elements are under legal uncertainty, which arises from the different interpretation of the ECJ judgment of 3 September 2014 made by the legislator and the Spanish Supreme Court to this date.
Legal complexity and uncertainty may lead to unfair situations, so we recommend that readers affected by this situation seek qualified professional assistance in this regard in order to avoid overtaxation, in particular, to those who filed their Spanish Inheritance tax three or four years ago, since they are also affected by the Spanish statute of limitations period.
