Spanish court throws out Spain’s higher IHT for non-EEA residents

Spain’s highest court has ruled a long-standing and controversial Spanish practice of charging non-residents of Spain a higher rate of inheritance tax to be discriminatory and therefore unlawful, potentially setting the stage for those who have paid the higher rate to file claims for refunds, according to reports. 

The practice isn’t acceptable even if the non-residents of Spain live in a third country that isn’t part of the European Union, according to the ruling, by the Tribunal Supremo (Spanish Supreme Court), last month.

As a result of this landmark case, non-EEA citizens who have paid Spanish inheritance tax in the last four years are expected to now be able to apply for a refund.

According to an analysis of the judgment by Antonio Barba, a Madrid-based tax partner with the Barcelona-based Cuatrecasas law firm, the practice of charging non-residents of Spain more comes from a traditional Spanish “regional inheritance taxation system”, under which Spanish regions have been entitled to apply tax breaks and reductions when the deceased person lived in their region.

When the deceased person or the heir doesn’t live in Spain, until now the IHT has been calculated under “central state rules, where no tax breaks are available”, Barba, pictured left, adds in his analysis, which was posted on the Kluwer International Tax Blog website.

The unfair tax treatment of non-Spanish residents attracted the attention of EU authorities some years ago, and eventually ended up in an EU Court of Justice judgment in 2014 that the regional tax differences had resulted in what Barber called “an unjustified breach” of EU regulations. It was this ruling that has now been upheld, and which now also applies to non-EEA residents.

Barba predicted that the judgment would have a “huge impact” on Spain’s current inheritance and gift tax rules, as it would not only force the Spanish authorities to amend their current legislation, but “opens the door for taxpayers to claim refunds of all taxes paid under the discriminative rules in the past four years, the standard term of the statute of limitations for taxes”.

“We estimate several hundred non-EU taxpayers to be entitled to apply for a refund of inheritance taxes paid [by them] to Spain during the last four years,” he told International Investment.

“Just think that many provinces of Spain, [such as] Baleares and Andalusia, where where foreign investments in real estate are huge. Most of the investors are EU residents — who are not affected by this last judgment, as the law was amended to give them tax breaks two years ago. But there are still quite a few investments from the US, Latin America, China, etc.”

Focus on Spanish property seen 

Mark Davies, managing director of Mark Davies & Associates, a London-based tax adviser to international clients,  also saw non-residents of Spain who own Spanish property or who have recently inherited it as being potentially affected by the Spanish court ruling.

“If you have inherited property and paid tax within the last four years, then you, or the estate, may be due a refund,” Davies said.

“In other cases, if you still own Spanish property, you may need to review your arrangements for dividing up your estate on your death.

“In the light of this decision, you may wish to change your will, if you made decisions to give Spanish property to Spanish heirs only to save tax .”

‘Where property is located matters’

Santiago Lapausa, a Marbella-based tax adviser with JC&A Abogados, who specialises in international tax matters, stresses “the importance of where the property is located” where IHT matters are concerned.

“Spain is formed of 17 different regions plus two autonomous cities that are each empowered to regulate certain taxes, and inheritance tax in particular,” Lapausa, pictured left, says.

“As a consequence, the tax to be paid by, say, a 30-year-old who inherits from his father € 800,000, of which €200,000 corresponds to his father’s house, would be nothing in Andalucía, but it would be around €1,586 in Madrid, compared to €155,393 in Aragón, or €103,135 in Asturias.”

The recent Spanish Supreme Court ruling, he added, opens the door for non-EU residents to request the application of the regional law in situations in which it would be  more favourable for them than the state law – “as it happened in 2015, for EU residents further to EU Court of Justice judgment” – and to initiate a claim.

“We helped our EU clients to successfully claim for their tax rebate” after that ruling, Lapausa added.

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