Tax on cross-border inheritances: end of discrimination against non-EU nonresidents
In its recent judgment of February 19th, the Supreme Court brought an end to discrimination against non-EU nonresidents for inheritance and gift tax purposes. Moreover, this judgement orders the Spanish State to reimburse them, with interest, for the difference between what they paid when they received their inheritances and what they would have paid had the tax authorities applied the autonomous community legislation that was connected to the inheritance or gift in question and was applicable when the tax fell due.
How did this discrimination happen?
In Spain there is a common Inheritance and Gift Tax Law applicable at central government level. However, the autonomous communities can use their legislative powers to introduce tax reliefs and reductions that considerably lower the tax charge with respect to the central government legislation. These reductions did not apply in cases where one of the parties involved in the inheritance was a nonresident. In these cases, the inheritance was governed by the central government legislation, thereby causing the discrimination. For example, regarding the same inheritance from a parent resident in Madrid, a sibling resident in Spain could apply a tax reduction of 99% to the inheritance tax charge, whereas a nonresident sibling had to pay the full tax charge (at a rate ranging from 7.65% to 34%).
The CJEU judgment of 09/03/2014 (case C-127/12) brought an end to this discrimination but only with respect to EU or EEA nonresidents. The Spanish government therefore considered that it could not be asserted by non-EU nonresidents, even though the CJEU clearly held that these differences in treatment between heirs ran counter to the free movement of capital enshrined in the EU treaties, there being no difference between residents of an EU or EEA country or residents of a non-EU country.
That said, the Supreme Court has finally brought an end to this unequal treatment between heirs, leaving it abundantly clear that the judgment of 09/03/2014 also covers residents of non-EU countries. The Court also considered that the requirement that the infringement by the Spanish State of the EU Law be “sufficiently characterized”, that is, serious and patent, had been met and, accordingly, ordered the tax authorities to reimburse non-EU nonresidents.
This judgment undoubtedly opens the possibility of initiating a proceeding for any adversely affected parties who have filed an inheritance and gift tax return in the past four years. The proceeding would allow them to apply for a refund of the tax incorrectly paid in Spain. The application should be drafted in a careful manner so that the Spanish tax authorities do not try to justify the discrimination by asserting incomparable situations, that there is no exchange of information with the third country in question, or other such arguments.
Garrigues Tax Department