Updated 15 July 2019: I’m very grateful once more to Blevins Frank’s Paul Montague for the following … confirmation that after Brexit, inheritance (and gift) tax levied on British nationals will still benefit from discounted rates.
In Spain, inheritance tax (‘succession and gift tax’ or ‘SSGT’) is governed by both the state and the Autonomous Communities. Each of these 17 communities has the right to amend the state rules to make them more beneficial, as several have done over recent years, including here in the Canary Islands. There has been a general trend towards substantial reliefs and increased allowances, resulting in almost total exemption from inheritance and gift tax in certain cases.
Until 2015, your heirs could only benefit from the more beneficial regional rules if you were “habitually resident” in that region. However, the European Court of Justice ruled that this treatment was discriminatory – it went against the EU principle of free movement of people and capital – and therefore Spain was forced to amend its legislation so that the regional SSGT rules could apply to anyone resident in the EU or EEA (European Economic Area).
While this was very welcome, heirs resident in say Australia or the US – or even the UK following Brexit – could pay much more tax than if they lived in the EU.
In February 2018 the Spanish Supreme Court published a judgement confirming that the Spanish succession and gift tax rules breach the free movement of capital established by the EU Treaty in relation to non-residents. Following this, the Spanish DGT (Dirección General de Tributos/General Directorate of Taxes) published some binding rulings in December confirming that the SSGT rules should be applicable to all non-residents – regardless of whether they reside in an EU/EEA member state or a third country.
Following these rulings, some taxpayers claimed for refunds for succession and gift tax paid under the discriminative rules. We have since heard that many of these claims (requested within the Spanish statute of limitations) have been successful and taxpayers have started to receive refunds from the tax office in Spain.
Although the tax law has still not been changed in this regard, it appears that the Spanish tax authority now officially accepts the application of the regional rules, instead of the less favourable state rules, where a third party (i.e. non-EU/EEA) is involved. The European Commission seems satisfied with this approach, and has therefore dismissed its official denouncement against the discriminatory rules previously filed by some Spanish lawyers.
In summary, if you now leave or gift assets to heirs who are not resident in the EU/EEA, they should be able to claim the application of the regional rules instead of the less favourable state ones.
This of course is particularly good news for UK nationals after Brexit.
Anyone who believes they have unfairly paid succession tax under the state rules should speak to their Spanish tax accountant about making a claim.
Please do not hesitate to contact me for more information about the regional Canary Islands succession and gift tax rules, or for advice on effective estate planning to reduce Spanish and UK inheritance taxes and achieve your wishes for your heirs.
Original post 21 March 2018: 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
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.