On 3 September 2014, the European Court of Justice (ECJ) ruled that the unequal treatment between non-residents (limited tax liability) and residents (unlimited tax liability) contained in the Spanish Inheritance and Gift Tax Law was in breach of EU law. This ruling puts an end to a longstanding controversy between the European Commission and the Kingdom of Spain regarding the illegality of this unequal treatment, which violates European fundamental freedoms, specifically the freedom of movement of capital and the freedom of establishment. In fact, the Commission first informed the Kingdom of Spain in 2007 that it considered the Spanish Inheritance and Gift Tax Law to be in breach of EU law, and called on Spain to amend the law and abolish the unequal treatment, but Spain did not comply with these requests. As a result, the Commission filed a lawsuit (Case C-127/12) before the ECJ in 2012, and this case has now been concluded with the aforementioned ruling.
- Subject matter of the proceedings
The subject of the proceedings before the ECJ was the unequal tax treatment that arises when applying Spanish legislation in the following situations:
a) Non-resident (limited tax liability) heirs or recipients who inherit or receive gifts of assets (primarily real estate) located in Spain.
b) Resident (unlimited tax liability) heirs or recipients who inherit or receive gifts of assets (primarily real estate) located abroad.
Heirs or recipients subject to inheritance or gift tax in either of the situations outlined above suffer an unequal treatment in that they are subject to a much higher inheritance or gift tax than they would be if they were either resident in Spain or if the assets were located in Spain.
The higher tax burden arises because, in these cases, only the Spanish Inheritance and Gift Tax Law of 1987 applies (Law 27/1987, of 18 December), which provides for very low or no exemptions, while in the other case – i.e., when resident heirs or recipients acquire assets located in Spain – the legislation of the relevant Spanish autonomous community is also applicable, as they have legislative powers in the field of inheritance and gift tax. The autonomous communities have made extensive use of these powers by significantly increasing the exemptions for inheritances falling under their jurisdiction or introducing other tax breaks. However, since Spanish legislation restricts the autonomy of the regional governments for inheritance and gift tax to either resident heirs or recipients or assets located in Spain, other taxpayers – see above under a). and b). – were unable to benefit from the higher exemptions and tax breaks.
As a result, in the case of residents in Spain, the vast majority of inheritances are tax-free, while non-residents are almost always required to pay inheritance tax, even if the estate is much lower, which constitutes an obvious and unjustifiable inequality.
This inequality is considered by the European Commission to be a violation of European fundamental freedoms, especially the freedom of movement of capital, which generally prohibits discrimination based on residence.
- Content of the ECJ judgment
The ECJ essentially follows the European Commission’s submissions and determines that the Spanish Inheritance and Gift Tax Law of 1987 breaches the freedom of movement of capital enshrined in Article 63 of the Treaty on the Functioning of the European Union (TFEU) and Article 40 of the Agreement on the European Economic Area, as a result of the unjustified inequality outlined above, and is therefore in breach of EU law.
- Consequences of the judgment for those affected
Of particular interest here is undoubtedly the impact of the judgment on taxpayers who find themselves in either of the situations outlined above and who have been assessed for inheritance or gift tax under the now-declared illegal.
As for the consequences of the ruling for those affected, the question arises as to whether those who have been taxed under the now-declared European law inapplicable provision are entitled to a refund of the excess inheritance tax paid, and if so, how to claim it.
The answer to this question is relatively straightforward: those affected have a legal right to a refund of the inheritance tax if it was assessed on the basis of the now-declared invalid provision.
However, the practical implementation of this right may not be straightforward, as there are legal issues to be aware of that could complicate or even thwart the exercise of the right to a refund. These are mostly of a legal-technical nature and must be taken into account to ensure that a refund claim is successful.
The following are some of the issues that must be considered:
- The peculiarities of Spanish tax law, which provide for different refund procedures and requirements depending on the type of tax return (tax declaration or tax assessment by the tax authorities).
- Tax limitation periods.
- Retroactivity of judgments of the Court of Justice of the European Union (CJEU) that declare national tax provisions inapplicable under European law.
- The question of the existence of a European law-based state liability claim against the Spanish state and its conditions under national law.
- Limitation periods for such claims.
- The relationship between the tax-based refund claim and the claim for compensation based on tort law.
It is important to note that the judgment of the CJEU and its consequences also apply to those affected who are resident in Switzerland, as the CJEU has consistently held that the freedom to provide services under European law has erga omnes effect, meaning that it also protects residents in third countries (neither EU nor EEA members).
Therefore, even those affected who are resident in Switzerland generally have the same refund claims as residents of an EU Member State.
For this reason, it is always advisable for all those affected by this judgment, especially non-resident persons who have inherited a property in Spain and paid inheritance tax in Spain, to seek advice from a lawyer knowledgeable in European law and Spanish tax law, who is also proficient in their language, to conduct a thorough examination of the existence of a refund claim and to be able to assert it in the best possible way for the affected person.
If you belong to the affected group of people, please do not hesitate to contact us. – Daniel Prieto