The judgment of the Tribunal of Justice of the European Union on the 3rd September declared that the Spanish regulation on Inheritance and Gift Tax is contrary to community Law, since it allows that on inheritance and gifts with non-residents, the tax payable be very much higher than that paid by residents, which is in breach of the free circulation of capital. Specifically, the discrimination consists in that on inheritance and gifts with non-residents, or for the gifting of real estate abroad, the state regulations must apply and at least from 7,65% to 34% be payable on the value of the assets. They are NOT allowed to apply the fiscal benefits approved by the various Autonomous Communities for their residents, which for example in the Balearic Islands suppose that inheritance between direct family members is taxable at the maximum rate of 1% and gifts at 7%.
We now know how the Government wishes to comply with the Judgment of the Tribunal of Justice of the European Union to avoid this discrimination. On the 25th September the Popular Party presented in Congress a modification amendment of the Law 29/1987 of Inheritance and Gift Tax (included in the Draft Bill of Reform of Income Tax as third final Provision) to introduce a series of rules which would allow a similar treatment between residents and non-residents.
According to this amendment, the most common cases of discrimination would be resolved in the following way:
- Inheritance with deceased non-resident in Spain who was resident in another county of the European Union or the European Economic Area: the heirs, residents or non-residents in Spain, will be able to apply the ruling of the Autonomous Community in which are located the highest value of the assets and titles of the inheritance in Spain.
Thus, for example, in the event of the death of a person resident in Germany with the greatest part of his assets (or all of them) in Spain, located in the Balearic Islands, (real estate, bank accounts, etc.,) his heirs, whether or not residents in Spain, will be able to apply the Balearic regulations and pay a maximum of 1% if they are spouse or children.
2.- Gift of real estate located in Spain: in the cases of donees resident in Spain or donees resident in other countries of the EU or the European Economic Area: they will be able to apply the ruling of the Autonomous Community where the real estate is located.
If the real estate is in the Balearic Islands, in principle it would be taxable at 7%.
In almost all probability, these new regulations will be approved before the end of 2014, although perhaps they could suffer some modification during the stages of parliamentary procedure.
They will be applied to inheritances and gifts with non-residents which arise as from its coming into force, but we consider that they will also serve to assess the difference between past tax paid on inheritance and gifts (from 7,65% to 34% with State regulations) and that which could have been paid with the application of these regulations and the corresponding autonomous ruling (1% with Balearic ruling, on inheritance).
It will be possible to apply to the Tax Office for the reimbursement of excessive taxes paid in the last 4 years (not lapsed) and even on lapsed taxes, patrimonial responsibility could be demanded to the State (maximum until the 3rd September 2015).
Regarding inheritances and gifts which are occasioned at the present time, before the new regulations come into force, we consider that they will also be applicable to calculate the tax to be paid.