Spanish Supreme Court ruling about discrimination against non-EU countries for inheritance & gift tax purposes

Spanish Supreme Court ruling about discrimination against non-EU countries for inheritance & gift tax purposes

The Spanish Supreme Court has just published a judgment confirming that Spanish succession and gift tax rules breach the free movement of capital established by the EU Treaty when they are applicable to non-EU/EEA nationals. I am once again grateful to Paul Montague of Blevins Franks for the following significant information.

Spanish Supreme Court ruling about discrimination against third countries (non-EU/EEA) for SSGT purposes – SPAIN

Background information

As we all know, back in October 2011, the European Commission decided to refer Spain to the European Court of Justice (ECJ) for discriminatory rules on succession and gift tax that required non-residents to pay higher taxes than residents.

The Commission considered this discriminatory tax treatment as an obstacle to the free movement of people and capital – fundamental principles of the EU’s single market, and it was in breach of Articles 45 and 63 of the Treaty on the Functioning of the European Union.

On 3rd September 2014 the ECJ ruled (C-127/12) that Spain was acting illegally by allowing its regional governments to charge extra Spanish Succession and Gift Tax (SSGT) on inheritances and lifetime gifts left to non-resident beneficiaries. Therefore, the ECJ supported the Commission’s argument.

After that ruling, the Spanish tax authorities amended the applicable rules at the end of 2014, including significant changes to the way the Spanish Autonomous Regions’ rules apply on inheritances and lifetime gifts for those EU/EEA residents. These new rules have been in force since 1st January 2015.

However, it is important to mention that the ECJ ruling did not refer expressly to its application to residents of third countries (non-EU/EEA). Therefore, the Spanish legislator decided to apply a very restrictive interpretation of the ruling and thus they removed the unfair discrimination only for EU/EEA residents, leaving others still in the same position. The new rules left non-EU/EEA residents under an unequal treatment for SSGT purposes and they had to continue calculating and paying SSGT under state rules instead of under the more favourable Spanish regional rules.

They did that despite the fact that the free movement of people and capital principle as established by the EU Treaty also includes third parties, not only EU and EEA countries.

Additionally, there are also many ECJ rulings defending the no discrimination for third parties, like C-181/12 Welte from 17th October 2013 –where German succession tax rules were considered discriminatory because an inheritance compromising a German property from a Swiss deceased person was taxed more heavily than an inheritance from an EU/EEA deceased person-. These ECJ rulings were binding both for the national courts of justice and for the tax offices, therefore, Spain should have changed the rules back in 2014 for all countries, not only for EU/EEA.

What has happened now?

Now, there is further good news as the Spanish Supreme Court has just published a judgement from 19th February 2018 (242/2018) confirming that the Spanish succession and gift tax rules breach the free movement of capital established by the EU Treaty when they are applicable to non-EU/EEA residents.

This important ruling concludes that the judgement issued by the ECJ on Spanish succession and gift tax rules back in September 2014 was founded on the free movement of capital, without any express limitations on extending its effects to third country (non-EU/EEA) residents and therefore it should also cover those who are resident outside the EU/EEA.

The case discussed here was raised by a Canadian resident beneficiary of an estate from her late mother (resident in Cataluña, Spain) who died on 18th March 2007. As the beneficiary of the inheritance, the daughter submitted the corresponding succession tax return on time, applying the state rules which resulted in a tax due of €308,547.34, which she paid.

Finally, it is important to mention that for the Spanish Supreme Court the breach is so clear and serious that it has also justified the civil liability of Spain (i.e. recognition of damages for taxpayers).

Who is affected?

Those who are (or were) resident outside the EU/EEA when receiving an inheritance or a lifetime gift if the Spanish succession and gift tax rules are applicable.

Blevins Franks says that it’s important to bear in mind that the SSGT law has not been changed, but this recent Spanish Supreme Court ruling will have an important effect on the current Spanish succession and gift tax rules for two different reasons:

  • It is possible that Spanish legislation could change in the future to extend the regional benefits to non-EU/EEA residents.
  • It also opens the door for taxpayers to claim back refunds for succession and gift taxes paid in the past under the discriminative SSGT rules (within the statute of limitations period; i.e. past four years).

This is good news for those who are residents outside the EU/EEA and it is particularly relevant for UK residents post Brexit.

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