RULING No. 242/2018 OF 19/2/2018 HAS IMPORTANT CONSEQUENCES FOR TRANSFER AND GIFT TAX … AND FOR FORM 720!
The Court of Justice of the European Union Ruling of 3/9/2014, Case C-127/12, ruled against Spain because the regulations of the Transfer and Gift Tax in force until then did not allow the application, in inheritance and donations involving non-residents, of the important tax relief measures approved by different Autonomous Communities for their residents. The CJEU considered that such discrimination of non-residents (who were under the obligation of paying more taxes exclusively applying state-wide regulations), violated Article 63 of TFEU, whereby “all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.”
Shortly afterwards Act 26/2014, of 27 November, was passed, and to comply with said CJEU Ruling of 3/9/2014, the regulations of Transfer and Gift Tax were modified as from 1/1/2015, allowing non-residents to apply tax benefits of the Autonomous Community with which they have a certain connection (place of residence of the deceased or heirs, place where assets in Spain are located), provided that they were citizens of a EU or EEA country. Thus, lawmakers decided to continue applying penalties to inheritance and gifts involving non-EU nationals.
In my post of 28/11/2014, I explained in detail the state of the regulations after CJEU Ruling 3/9/2014, stating that discrimination against non-EU subjects continued to be a clear violation of EU Law, especially considering CJEU Ruling 17/10/2013, Case C-181/12 (Welte), which had ruled against Germany for discriminating residents in Switzerland via Inheritance Tax.
Spanish lawmakers decided to apply a restrictive interpretation of CJEU Ruling 3/9/2014, which went against Spain, and the same was done by the Tax Administration and the Central Economic and Administrative Court, systematically rejecting applications for the refund of Transfer and Gift Tax submitted by non-EU subjects.
- “MY” SUPREME COURT RULING 17/10/2017 CONSIDERED THAT SPANISH LAWMAKERS HAD MANIFESTLY AND SEVERLY VIOLATED EU LAW
A few months ago, the Supreme Court gave me notice of Ruling No. 1566/2017, given on 17/10/2017, which obligated the State to compensate a client of our law firm with residence in the EU (Germany), who had paid a high sum for Inheritance Tax because she was not allowed to apply the regulations of the place where the property she inherited is located (Balearic Islands, with whose regulations she would have paid 1%). The Supreme Court applied a harsh sentence to the State, including Court costs, considering that the regulations in force until the end of 2014 (which was discriminatory against non-residents), cancelled by CJEU Ruling 3/9/2014, had MANIFESTLY AND SEVERELY violated EU Law, specifically the free circulation of capital (article 63 of TFEU).
In my post of 25/10/2017, I explained that the Supreme Court Ruling of 17/10/17 (which was followed by other similar ones) could be very important to solve other cases in which there were further blatant violations of EU Law:
– those in which there is discrimination against non-EU subjects in Transfer and Gift Tax, which Spanish lawmakers decided to maintain in place after CJEU Ruling 3/9/2014,
– those related to the application of the rules regulating Form 720, the statement informing of assets and rights abroad, which establishes absolutely disproportionate penalties and even ‘inextinguishability’.
In my post of 13/2/2017, I provided a number of examples of absurd, unjustified discriminations owing to Transfer and Gift Tax that were occurring on a daily basis with non-EU subjects (violating not only EU Law but also the Spanish Constitution), and in my post of 7/11/2017, published on the FISCALBLOG that I admire so much, I was very optimistic trusting that it would soon be solved, largely because the European Commission was considering infringement proceedings against that discrimination.
- ACCORDING TO SUPREME COURT RULING 19/2/2018, THERE IS ALSO A VIOLATION OF EU LAW IN RESPECT OF NON-EU SUBJECTS
Well then, the recent SUPREME COURT RULING No. 242/2018, of 19/2/2018, declared clearly and forcefully that NON-EU NON-RESIDENTS cannot be discriminated against through the application of Transfer and Gift Tax, and it sentenced the State to compensate an individual with residence in Canada (by refunding the difference between what that individual paid applying state-wide regulations and what should have been paid applying regulations of Catalonia).
The Supreme Court makes it very clear that the CJEU Ruling of 3/9/2014 also protects residents of non-EU countries. To reach this conclusion, it uses as its basis that same CJEU Ruling of 3/9/2014 and EU Case Law, in particular the CJEU Ruling of 17/10/2013, Case C-181/12 (Welte), which we referred to above. In effect, according to this Case Law, inheritance and gifts are indisputably movements of capital, and article 63 of TFEU precisely prohibits all restrictions on movements of capital, also with third countries.
Furthermore, the Supreme Court considers that the violation of EU Law, consisting of discriminating residents in third countries, is sufficiently characterized, that is, it is MANIFEST AND SEVERE, otherwise it would not have sentenced the State to pay compensation.
- THE WAY IS PAVED TO APPLY FOR AND OBTAIN REFUNDS OF EXCESS TAXES PAID BY NON-EU SUBJECTS
The Supreme Court Ruling No. 242/2018, of 19/2/2018, thus paves the way for individuals who have paid very high Transfer and Gift Tax on an inheritance or gift from residents in non-EU countries to apply for and obtain refunds (provided the right has not been extinguished, which occurs when more than 4 years have elapsed).
I ALWAYS SAID IT WAS WORTHWHILE TO CLAIM THOSE REFUNDS, now more than ever, for taxes accrued before or after 1/1/2015, the date when the current regulations entered into force, which lawmakers will have to amend—sooner rather than later.
In any event, it is important to adopt the BEST APPROACH when filing claims for the refund of taxes unduly paid, because the Treasury could object and try to justify the discrimination case by case, based on what is provided by article 65 of TFEU (contending that situations are not comparable, that there is no exchange of information with the third country involved, etc.)
- EFFECTS OF THE SUPREME COURT RULING IN RESPECT OF FORM 720
As I already commented, in my opinion the aforesaid Supreme Court Rulings of 17/10/2017 and 19/2/2018 may also be decisive in relation to Form 720 (statement of assets and rights abroad).
The disproportionate penalties and consequences provided for any non-compliances with the information statement are a flagrant violation of EU Law, in particular the free circulation of capital in article 63 of TFEU. Our law firm reported this to the European Commission in February 2013, and in February 2017, by means of a Reasoned Opinion, required Spain to modify those regulations.
Since Spain has not reacted, I think it will not be long before the EC files a claim with the CJEU, which I have no doubt will end up cancelling those disproportionate penalties and consequences … both in respect of assets and rights located in the EU or EEA and in non-EU countries. IT’S A MATTER OF TIME ;-))))
Palma de Mallorca, 15 March 2018
Alejandro del Campo Zafra
Solicitor and tax consultant