At the present time there are two serious problems regarding Inheritance and Donations with regard to non-residents, with reference to payments to be made in Spain on Inheritance and Donations Tax:
1.- DISCRIMINATION (non-residents pay much more than residents).
2.- DOUBLE TAXATION (on occasions this tax must be paid in two countries on the same assets).
DISCRIMINATION
In Spain on inheritance and donations between non-residents, even between direct family members (between spouses, from parents to children, etc.) taxes must be paid by applying the national regulations. A sliding scale is applied, which goes from 7,65% up to 34% on the true value of the assets and rights transmitted.
However, on inheritance and donations between residents, direct family members, much lower taxes or even nothing, are paid, because the regulations of the Autonomous Communities are applied, which have approved for their residents some important discounts.
For example, in the BALEARIC ISLANDS, since 2007, donations values from direct resident family members, pay tax at 7%. Inheritance is taxed at 1%, applying the Balearic regulations if two conditions are fulfilled simultaneously: that the deceased has his fiscal residence in Spain and has resided more time in the Balearic Islands over the last 5 years, and that his heirs are fiscal residents in Spain (though not necessarily in the Balearic Islands).
VALUE |
INHERITANCE TAX (€) |
|
INHERITANCE (€) |
In favour of 1 direct heir with NATIONAL REGULATIONS (Scale) |
In favour of 1 direct heir with BALEARIC REGULATIONS (1%) |
250.000 |
40.560,31 (16,22%) |
2.500 |
500.000 |
110.484,09 (22,10%) |
5.000 |
1.500.000 |
447.997,34 (29,87%) |
15.000 |
3.000.000 |
973.297,34 (32,44%) |
30.000 |
This discrimination is very serious. Cases are arising in which on one same inheritance, on the demise of a parent residing in the Balearic Islands, in favour of two children, one of them pays Inheritance Tax to the Balearic Tax Office at 1% as a fiscal resident in Spain, and the other has to pay to the National Tax Office a much higher tax since he does not reside in Spain.
On inheritance or donations in favour of indirect family members (siblings, uncles or aunts, nephews, etc.) or non-family members, the tax to be paid is very high, between residents and between non-residents. There is no discrimination.
The good news is that the European Commission is putting a lot of pressure on Spain to avoid this discrimination, which it considers to be contrary to the free circulation of persons and capital, which are fundamental principles of the European Union market, infringing the Treaty of Operation of the European Union:
- 5/5/2010 Judgement motivated by the European Commission requesting the modification to Spain
- 17/2/2011: Complementary Judgement motivated by the European Commission reiterating request
- 27/10/2011: The European Commission decides to denounce Spain before the Tribunal of Justice of the European Union
- 7/3/2012: The European Commission lodges an Appeal against Spain before the Tribunal of the European Union (matter C-127/12)
- 28/4/2012: Publication of mediation of the Appeal in the Official Agenda of the European Union.
This complaint may have two very important effects:
In the first place, it will force Spain to modify the regulations on Inheritance and Donations Tax, which could suppose an important reduction of the afore-mentioned taxes for non-residents, at least for those who reside in the European Union. Otherwise, there exists the possibility that heavy fines be imposed on Spain.
In the second place, this complaint is a good argument for the persons who have paid excessive taxes on inheritance or donations between non-residents (that have not prescribed and are higher than those applicable to residents in the different Autonomous Communities), or who are obliged to pay them in accordance with the current regulations, that they might initiate proceedings to try to recuperate the taxes paid in excess in Spain, even before a possible modification comes into force and even before this question is taken up at the Tribunal of Justice of the European Union. Precedents exist, similar to the case in hand, in which the Spanish Tribunals have seen a clear infraction of Community Law and have allowed those taxes to be recuperated without having to wait for the pronouncement of the Tribunal of Justice of the European Union. This happened for instance when non-residents were obliged to pay 35% on wealth tax rather than the 15% which residents paid (up until the 31/12/2006), and the Superior Tribunal of Justice of the Balearic Islands in a Sentence dated 29th January 2009 allowed non-residents to recuperate the excess paid before the Tribunal of Justice of the European Union condemned Spain for this very discrimination by means of a Sentence dated 6th October 2009 (matter C-562/07). These proceedings may last for years, therefore it is worthwhile in function of the possible excess paid, and logically, it would have no meaning if the tax paid in Spain by the non-resident has been deducted in full or in the main part from the tax payable in his country of residence.
DOUBLE TAXATION
Serious cases of double taxation are also occurring.
For example, non-resident heirs who are obliged to pay in Spain a high inheritance tax on the inheritance of assets located in Spain (money or properties) and who also have to pay inheritance tax on the same assets in the country in which they reside (United Kingdom or Germany, etc.) without being able to deduct what they have paid in Spain.
The problem is that Spain only has an Agreement to avoid Double Taxation on Inheritance and Donations with France, Greece and Sweden. The Agreements of Double Taxation with the United Kingdom, Germany, etc. refer only to Income Tax and Wealth Tax, for which reason these situations of double taxation may arise.
The Tribunal of Justice of the European Union in a Sentence dated 12/2/2009 made a pronouncement on this problem and allowed double taxation in the event of an heir resident in Germany who inherited bank accounts in Spain, who paid Inheritance Tax in Spain and in Germany on the said accounts, and who was not allowed to deduct in Germany the tax paid in Spain.
The other good news is that on the 15/12/2011 the European Commission presented a global package on inheritance taxation. By means of a Communication, a Recommendation and a working document, the European Commission analysed these problems and proposed to ALL THE MEMBER STATED a series of solutions and measures precisely to avoid the two problems here shown:
- Double or multiple taxation
- .Discrimination.
Since the serious problems commented upon seem to be at least on the way to being resolved in the not too distant future, I would make three recommendations:
- As far as possible, it would be preferable not to die at the moment, before a more favourable ruling is approved. To not pay Inheritance Tax, the best advice is not to die (IT`S A JOKE)
- If someone has lost or loses a member of his family before the ruling changes and has paid or is obliged to pay a high and discriminating Inheritance Tax, he may consider immediately starting up proceedings to apply for a reimbursement of the excess tax paid or which he will have to pay. He now has a good basis for this.
- It is not advisable to hurry at this moment in time and carry out certain transactions with the intention of avoiding or reducing Inheritance Tax in the future (donations of property in one’s lifetime, contributions to companies, etc.) These transactions may have important fiscal consequences which must be analysed, and in the end higher taxes might be paid now than what might be saved in the future.
Palma de Mallorca, May 2013
Alejandro del Campo Zafra
Lawyer-Fiscal adviser
SUMMARY
Regarding inheritance and gifts between direct family members (parents, children, spouses, grandparents, grandchildren):
When Inheritance and Gift Tax is payable in SPAIN-(STATE), the national regulations are applicable and a sliding scale is applied from 7,65% to 34%, or even more.
When Inheritance and Gift Tax is payable in SPAIN-BALEARIC ISLANDS, the regulations of the Balearic Islands are applicable and 1% is paid on inheritance and 7% on gits.
INHERITANCE |
HEIR NON RESIDENT IN SPAIN |
HEIR RESIDENT IN SPAIN (In the Balearic Islands or any other Spanish Community
|
|
DECEASED NON RESIDENT IN SPAIN |
Assets In Spain |
PAYABLE IN SPAIN-(STATE) Only on the value of assets located in Spain
|
PAYABLE IN SPAIN-(STATE) On the value of assets world-wide, in Spain and outside Spain, but the tax paid abroad on assets outside Spain will be deductible. |
Assets outside Spain |
NOT PAYABLE IN SPAIN |
||
DECEASED RESIDENT IN SPAIN, IN THE BALEARIC ISLANDS |
Assets in Spain |
PAYABLE IN SPAIN-(STATE) Only on the value of assets located in Spain |
PAYABLE in SPAIN-BALEARIC ISLANDS and with the Balearic regulations (1% between direct family members) if the deceased has resided in the Balearic Islands for more time over the last 5 years (minimum 2,5 years). Taxes are payable on the value of assets located world-wide, but the tax paid abroad may be deducted. |
Assets outside Spain |
NOT PAYABLE IN SPAIN |
DONATIONS (GIFTS) |
BENEFICIARY NON RESIDENT IN SPAIN |
BENEFICIARY RESIDENT IN SPAIN |
|
DONOR NON RESIDENT IN SPAIN |
Assets in Spain |
PAYABLE IN SPAIN-(STATE) Only on the value of assets located in Spain |
PAYABLE IN SPAIN-BALEARIC ISLANDS If it is a donation of property located in the Balearic Islands or shares in companies which have properties mainly in the Balearic Islands (it is indifferent if the beneficiary resides in the Balearic Islands or in any other Spanish Community).
PAYABLE IN SPAIN-OTHER SPANISH COMMUNITY if it is a donation of property located in Spain in another Spanish Community (it is indifferent if the beneficiary resides in the Balearic Islands or in any other Spanish Community.)
PAYABLE IN SPAIN-BALEARIC ISLANDS If it is a donation of other assets and interests located in Spain (in the Balearic Islands, in any other Spanish Community) or outside Spain (for example, real estate abroad, etc.) if the beneficiary has resided in the Balearic Islands for more time over the last 5 years (at least 2,5 years), but the tax paid abroad for donation of assets outside Spain will be deductible. |
Assets outside Spain |
NOT PAYABLE IN SPAIN |
||
DONOR RESIDENT IN SPAIN |
Assets in Spain |
PAYABLE IN SPAIN-STATE Only on the value of assets located in Spain |
PAYAB LE IN SPAIN-BALEARIC ISLANDS If it is a donation of property located in the Balearic Islands or shares in companies which mainly have real estate in the Balearic Islands (it is indifferent if the beneficiary resides in the Balearic Islands or in any other Autonomous Community.
PAYABLE IN SPAIN-OTHER SPANISH COMMUNITY if it is a donation of property located in Spain in another Spanish Community (it is indifferent if the beneficiary resides in the Balearic Islands or in any other Spanish Community.
PAYABLE IN SPAIN-BALEARIC ISLANDS If it is a donation of other assets and interests located in Spain (in the Balearic Islands, in any other Spanish Community) or outside Spain (for example, money in Spain or outside Spain, properties abroad, etc.) if the beneficiary has resided in the Balearic Islands more time over the last 5 years (at least 2,5 years), but the tax paid abroad on the donation of assets outside Spain is deductible. |
Assets Outside Spain |
NOT PAYABLE IN SPAIN |
European Commission – Press release
Taxation: Commission refers Spain to the Court of Justice over discriminatory inheritance and gift tax rules
Brussels, 27 October 2011 – The European Commission has decided to refer Spain to the EU’s Court of Justice for discriminatory rules on inheritance and gift tax that require non-residents to pay higher taxes than residents.
The Commission had already formally requested Spain on 5 May 2010 (IP/10/513) and additionally on 17 February 2011 to take action to ensure compliance with the EU rules in regard to inheritance and gift tax provisions. However, no amendments have been made to Spanish legislation on the matter.
Inheritance and gift tax in Spain are regulated at both state level and at the level of autonomous communities. The autonomous communities’ legislation grants residents a number of tax benefits that, in practice, allow them to pay much lower taxes than non-residents.
The Commission considers that this discriminatory tax treatment constitutes an obstacle to the free movement of people and capital, fundamental principles of the EU’s Single Market, and is in breach of the Treaty on the Functioning of the European Union (Articles 45 and 63 respectively).
Background
For press releases on infringement cases in the taxation or customs field see:
http://ec.europa.eu/taxation_customs/common/infringements/infringement_cases/index_en.htm
For more information on EU infringement procedures, see MEMO/11/739.
For the latest general information on infringement measures against Member States see:
http://ec.europa.eu/eu_law/infringements/infringements_en.htm
Contacts : Emer Traynor (+32 2 292 15 48) Natasja Bohez Rubiano (+32 2 296 64 70) |
Official Journal of the European Union 28/4/2012
Action brought on 7 March 2012 — European Commission v Kingdom of Spain
(Case C-127/12), (2012/C 126/18)
Language of the case: Spanish
Parties
Applicant: European Commission (represented by: W. Roels and F. Jimeno Fernández, Agents)
Defendant: Kingdom of Spain
Form of order sought
The applicant claims that the Court should:
— declare that, 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 Articles 21 and 63 of the Treaty on the Functioning of the European Union (TFEU) and Articles 28 and 40 of the Agreement on the European Economic Area (EEA);
— order the Kingdom of Spain to pay the costs.
Pleas in law and main arguments
1. In Spain, the Impuesto sobre Sucesiones y Donaciones (succession and donation tax) is a national tax, the basic provisions for which are laid down in Ley 29/87 (Law 29/87) of 18 December 1987, and in the regulation adopted by Real Decreto (Royal Decree) 1629/1991 of 8 November 1991. The management and collection of the tax was granted to the Autonomous Communities, although national legislation applies in the cases laid down therein, that is, primarily in cases in which there is no personal or real connection with an Autonomous Community.
2. In all of the Autonomous Communities which have adopted succession and donation tax legislation, the tax burden born by the tax payer is considerably lower than that imposed under national legislation, which leads to a difference in tax treatment of donations and successions between bene
ficiaries 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.
3. The Spanish national legislation at issue infringes Articles 21 and 63 TFEU and Articles 28 and 40 EEA.
European Commission – Press release
Commission proposes measures to tackle cross-border inheritance tax problems
Brussels, 15 December 2011 – EU citizens that inherit foreign property are frequently faced with a tax bill from more than one Member State. In fact, in extreme cases the total value of a cross-border inherited asset might even have to be paid in tax, because several Member States may claim taxing rights on the same inheritance or tax foreign inheritances more heavily than local inheritances. Citizens may be forced to sell inherited assets, just to cover the taxes, and small businesses may face transfer difficulties on the death of their owners. To tackle these problems, the Commission today adopted a comprehensive package on inheritance taxation. Through a Communication, Recommendation and Working Paper, the Commission analyses the problems and presents solutions related to cross-border inheritance tax in the EU. Algirdas Šemeta, Commissioner for Taxation, Customs, Anti-fraud and Audit, commented:
“Benjamin Franklin once said that nothing is certain except death and taxes. Unfortunately, when you put the two together, a huge amount of uncertainty seems to arise. The burden of cross-border inheritance tax can be crippling for citizens, due to discrimination and double taxation. Small changes in Member States’ rules to make them more coherent with each other could deliver real benefits for hundreds of thousands of people across Europe. This is what we aim to achieve.”
Background
Today’s Communication points out that there are two main problems when it comes to cross-border inheritance tax in the EU:
The first is double or multiple taxation, where more than one Member State claims the right to tax the same inheritance. Divergent national rules, a shortage of bilateral inheritance tax conventions, and inadequate national double tax relief measures can result in citizens being taxed twice or more on the same inheritance. Member States are free to apply national inheritance rules as they see fit once they are in line with EU rules on non-discrimination and free movement. The Commission is not proposing any harmonisation of Member States’ inheritance tax rules. Instead it is recommending a broader and more flexible application of national double taxation relief measures so as to provide a pragmatic, speedy and cost-effective solution to the significant tax burdens facing many citizens. The Recommendation in today’s Package suggests how Member States could improve existing national measures to ensure that there is adequate double tax relief. It sets out solutions for cases in which several Member States have taxing rights. The Commission invites Member States to introduce the appropriate solutions into national legislation or administrative practices.
The second inheritance tax problem that citizens can encounter is discrimination. Some Member States apply a higher tax rate if the assets, the deceased and/or the heir are located outside their territory. In such cases, EU law is clear: Member States are obliged to respect the basic principles of non-discrimination and free movement set out in the Treaties. The Working Paper published today sets out the principles on non-discriminatory inheritance and gift tax, using case-law to illustrate them. This will help Member States to bring their provisions into line with EU law, while also raising citizens’ awareness of the rules which Member States must respect.
Although cross-border inheritance tax problems may seriously affect individuals, revenues from domestic and cross-border inheritances taxes account for a very small share – less than 0.5% – of total tax revenues in Member States. Cross-border cases alone must account for far less than that figure.
Next steps
The Commission will launch discussions with Member States to ensure appropriate follow up to the Recommendation. In addition, it is ready to assist all Member States in bringing their inheritance laws into line with EU law. In 3 years time, the Commission will present an evaluation report showing how the situation has evolved, and decide on this basis whether further measures are necessary at national or EU level. Meanwhile, the Commission, as guardian of the Treaties, is continuing to take the necessary steps to act against discriminatory features of Member States taxation rules.
For the full texts of the Communication, Recommendation and Staff Working Paper, see:
http://ec.europa.eu/taxation_customs/taxation/personal_tax/inheritance/index_en.htm
For more information, see MEMO/11/917
Contacts : Emer Traynor (+32 2 292 15 48) Natasja Bohez Rubiano (+32 2 296 64 70) |
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