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Analysis of Inheritance Tax vs Community Legislation

20 Dec 2011

The Spanish inheritance and gift tax (ISD) gives rise to a number of problems from a Community law standpoint. This is due to the exercise by autonomous communities of their legislative powers in this area and to the restriction placed on taxpayers not resident in Spain, who cannot benefit from the advantages offered by autonomous community legislation. This restriction also operates where the decendent is not resident in Spain, regardless of whether or not the heirs have tax-resident status in Spain. Taxand Spain analyses what this means for residents and non residents of Spain.

The application of the autonomous community legislation to the sibling resident in Spain would entail, among other advantages, the application of relief equal to 99% of the tax payable, which relief could not be claimed by the siblings with tax-resident status in the EU. There would also be discrimination between the tax treatment given in Spain to assets and rights inherited from a decendent who had tax-resident status in an autonomous community at the time of death and that given to those inherited from a decendent who had tax-resident status in the European Union.

This discrimination caused by legislation was also disclosed in a study commissioned by the European Commission as part of a public consultation on cross-border inheritance tax obstacles and possible solutions. This study highlighted the potential conflicts between domestic ISD legislation and the Treaty, including the fact that some tax systems (the Spanish system is one of them) provide for higher exemptions ("personal allowances") for resident taxpayers. In this connection, specifically with respect to Spain, it indicated that the beneficiaries of an objective exemption were subject to different tax systems depending on residence either in an autonomous community or abroad, which could lead to situations of discrimination.

The European Court of Justice (the ECJ) has also taken the view, in abundant case law, that legislation similar to Spanish legislation, which denies a tax benefit depending on a merely ancillary circumstance such as the residence of the decendent or of the taxpayer, restricts the free movement of capital and cannot be justified by virtue of the provisions of the Treaty. In this connection, the ECJ has held that inheritances constitute movements of capital within the meaning of the Treaty, except where their constitutional elements are located within a Member State.

In fact, ISD legislation such as the ISD legislation could serve to discourage heirs resident in Spain, for example, from transferring their residence to another EU Member State since, if they did so, they would forfeit any tax benefits offered by the applicable autonomous community legislation.

The Commission has not only brought an infringement proceeding against Spain for the reasons analysed, but has also done so against other Member States with ISD legislation that entails the grant of favourable treatment to non residents of said State over that granted to non resident of the European Union. In particular, the Commission has brought infringement proceedings relating to inheritance and gift tax against Germany (IP/11/294), Belgium (IP/11/425), the Netherlands (IP/10/1252) and Luxembourg (IP/10/794).

Taxand's Take

In the immediate future, requests for the rectification of ISD returns should be filed by heirs who have suffered this discrimination, asking the tax authorities to refund tax paid in excess by virtue of a provision which is in breach of Community Law. For such purpose, please note that the deadline stipulated by legislation for requesting such rectification is four years after the end of the voluntary filing deadline. More than four years thereafter, it would only be possible to claim a refund of tax paid in excess from the tax authorities by filing a claim for liability, but this would require a ruling from the ECJ declaring the incompatibility of ISD legislation with Community Law.

Your Taxand contacts for further queries are:

Jos? Ignacio Guerra
T. +34 91 514 52 00

Beatriz Alba
T. +34 91 514 52 00

Taxand's Take Author