The European Court of Justice (ECJ) stated that Spain infringed on the freedom of capital circulation by treating residents and non-residents differently in the taxation of inheritance and gifts. Non-resident taxpayers affected by this are entitled to the return of the improper calculation of the Inheritance Tax (ISD) from the last four years or the possibility of demanding state liability.
Discrimination of non-resident taxpayers
The debated question in the judgement is the treatment of the inheritance and gift tax on non-residents in Spanish law. The Law of ISD permits autonomous communities to establish diverse fiscal reductions applicable only to residents in its territories. Therefore, inheritances and gifts, or property located outside Spanish territory, that a non-resident taxpayer on Spanish territory received, could not benefit from these fiscal reductions. Hence, it gave birth to discrimination in fiscal treatment contrary to European law.
The ECJ stated that if the Spanish norm considers both heirs and grantees, whether or not they are residents or not, as taxable persons, or property situated within or outside the national territory as taxable property, there is no difference between the resident and non-resident taxpayer, or between one property and another, that can support the difference in treatment. Thus, legislation such as the Spanish one cannot — without discriminating — treat people differently within the framework of the same tax to those categories of taxable persons or property concerning tax reductions.
Consequences and practical effects: returns of sums paid, State liability and reform of the ISD
Following this judgement, heirs of the same inheritance tax, some benefiting by the mere fact of being residents of the same Autonomous Community as the deceased and others discriminated against from applying the tax benefits provided by state law, can no longer be taxed differently.
The judgement creates the possibility of returning paid taxes on inheritances and gifts from previous years to non-residents of the European Union (taxes paid where the four-year limitation period has not expired). Additionally, the judgment requires that the Spanish legislation be made congruent with European jurisprudence to avoid future discrimination.
The Spanish Treasury must issue refunds requested by taxpayers, affecting community resident groups I and II (parents and children). It must return sums paid for improper calculations in the last four years and/or claims for damages. This will require determining what is or has been the bonus of each year and the location of the inherited or gifted property.
Concerning required inheritance and gift taxes that have been paid, one might include the possibility of requiring State liability or compensation of damages for having demanded taxes that do not conform to the EU tax regulations.
The tax reform undertaken by the Spanish government in 2014 did not address a recommendation in the Report of the Committee of Experts for the Reform of the Spanish Tax System, namely, the modification and harmonization of inheritance and gift taxes. However, following the judgment of the ECJ, its reform is essential.
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