Inheritance and Gift Taxes in Spain: the differences between the Spanish Inheritance Tax (IHT) to be paid in the different regions of Spain (comunidades autonomas) and the National IHT: differences between residents and non tax residents in Spain. Is the Spanish IHT system discriminatory? What lies ahead?

IT IS very common to see articles in the press but especially the press for foreigners living in Spain (expats) mostly British, referring to the Spanish Inheritance and Gift Tax IHT (Impuesto Sucesiones y Donaciones: ISD). The reason is obvious, since this tax can be very high, depending on whether the deceased and his heirs are tax residents in a particular Spanish Autonomous Community or not, if they are Tax Residents in Spain or not, etc.

Our firm has been advising for many years on inheritance tax planning and we have seen with some concern that some people have been advised to set up company structures, which can be expensive to create and maintain, with the aim of preventing future IHT liabilities, when in many cases there was no need to as the potential IHT bill could be minimised with other measures that are much simpler, cheaper and cost effective.

In any case, our aim in this article is to inform our readers, especially those whose future heirs are not tax resident in Spain, that the European Commission has formally requested from Spain a change in the regulation of the IHT, as generally it is higher when the heir or beneficiary is Non Tax Resident in Spain (irrespective of his nationality).

Thus, as stated by the Commission itself, in practice when the rules of the different autonomous community apply to the Inheritance and Gift Tax, the result is that the bill is considerably less than when National or State law applies. And since National or State law on inheritance applies when the beneficiary or deceased do not have their habitual residence for a specified number of years in an autonomous community, in practice this means that normally Non Tax Resident in Spain or Tax Resident in Spain who moved to another community, have to pay more Inheritance Tax or Death Duties than the habitual tax residents in a community for longer time.

Therefore the European Commission concludes that the Spanish Laws imposes a higher tax burden on non-residents and on assets held abroad. The Commission understands that the Spanish regulations are incompatible with the free movement of workers and capital as provided by the European Union Treaty and constitutes an obstacle to free movement of persons and capital in breach of the Treaty on the Functioning of the European Union (Articles 45 and 63 respectively).

Recently a new ‘complementary reasoned opinion’ has been sent to Spain by the Commission after a previous one was sent on May 2010. It should be noted that Spain already made some amendments in this field, but the European Commission still understands that it does not fully comply with the EU Law. So, if there is no satisfactory response, Spain could be referred to the Court of Justice of the European Union.

Our opinion is that the European Commission is correct when it considers that the Spanish IHT laws in practice, if not expressly, are discriminatory. We believe that it will probably be changed quite soon in order to fulfil the European Union principles of freedom of movement and equality.

The same thing happened in the past with the Capital Gains Tax (CGT), when Non Tax Residents paid more CGT than Tax Residents in Spain but after several Court decisions and pressure from the European Union, the law was changed and the CGT tax is now the same for everyone.

This also opens the possibility to think about appealing against the IHT bills to be paid as they could be considered discriminatory, just as previously done with the Capital Gains Tax before the law was changed. This could be an interesting option when the IHT to be paid is very high. If this is your case or the case of someone you know, please do not hesitate to contact us.

The information provided on this article is not intended to be legal advice, but merely conveys general information related to legal issues.