The European Court of Justice decreed on Wednesday (3rd September) that Spain is contravening EU law because it treats residents and non-residents differently with regard to tax on inheritance and donations. This ruling means that non-residents who have inherited assets in Spain or have received them as donations in the past will be able to apply for a refund of the amount they were overcharged in tax.
The case was brought against Spain by the European Commission in 2012, on the grounds that the taxes on inheritance and donated assets are incompatible with the Treaty of the Functioning of the EU with regard to free movement of people and capital, and also the European Economic Area Agreement.
The European Court of Justice accepted Spain’s argument that these tax laws do not impede freedom of movement of people, but found that they do contravene the regulations regarding the free movement of capital.
State versus regions
It is the Spanish State that handles these taxes where non-residents are concerned, while in the case of residents the taxes are paid to the autonomous region which was the normal place of residence of the deceased or the donor. As a result, non-resident beneficiaries normally end up paying considerably more, because the different regions are able to determine their own fiscal reductions. This means that non-residents who inherit, or are the recipient of a donation, are unable to take advantage of these tax reductions.
The European Court decreed that Spain is guilty of discrimination in cases where the deceased person or donor, the person inheriting or the recipient are not resident in the country, and also when the donated assets are situated abroad. The court ruled that the value of the inheritance or the donation is being reduced because non-residents are exempt from the fiscal reductions which apply to residents, and that this is a restriction on the free movement of capital.
It maintained that there is no difference between the objective situation of a Spanish resident and non resident that can sustain such a difference in treatment, and that Spain has failed to comply with its obligations, is guilty of discrimination and is blatantly contravening the principle of free movement of capital.
Refunds
José María Caro, of the leading law firm Martínez Echevarría, Pérez & Ferrero Abogados, has been studying this case and says that people who are non-resident and who have paid inheritance or donation tax during the past four years can now demand a refund of the difference between the amount of tax they were charged by the State and the amount they would have been charged if the relevant regional tax reductions had been applied. In some cases, these refunds could be considerable.
There may also be a way for those who paid these taxes before the four-year period of prescription to apply for the amount that had been overcharged to be refunded to them.