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EU Law May Require Spain to Extend Domestic Inheritance Tax Exemptions to all EU Residents
Spanish resident taxpayers are moving towards practically total exemption from inheritance and gift tax (IGT) in transfers to descendents and spouses. These improvements may be soon extended to non-residents. Although IGT legislation is regulated by each Autonomous Community, there has been a general trend towards full or almost full exemption in the last years. Taxand Spain explores the IGT exemption and whether it will be extended to all EU residents.
However, exemptions are not applicable to non-residents, who are charged IGT on their Spanish property at progressive rates ranging from 7.65% to 34%. And this basic rate can increase significantly when the beneficiary's kinship with the deceased is not close and his pre-existing wealth was high. For example, for a beneficiary whose pre-existing wealth in Spain is in the top bracket, the rate can jump to 40.8 %, even for inheritance from a parent.
This tax burden is one of the reasons why many non-residents have acquired their properties in Spain, for example many coastal residences or operating companies through off-shore vehicles.
However, on 5 May the European Commission issued a reasoned opinion that could bring about a landslide change in the Spanish IGT treatment of non-residents - at least for EU residents. According to the press release published by the Commission, it has asked Spain to amend, within two months, the IGT provisions which impose a higher tax burden on non-residents. The Commission also refers to the less favourable treatment of assets held abroad by Spanish residents as compared to assets held in Spain.
The European Court of Justice declared that the different taxation of capital gains - until 31 December 2006 - for residents and non-residents was contrary to Community Law. Gains obtained by Spanish resident individuals on assets held for more than one year were taxed at a 15% rate, while similar gains obtained by non-residents were subject to a 35% rate. Spain ended this discrimination on 1 January 2007, establishing an 18% tax rate (19% as of 1 January 2010) for all capital gains obtained by individuals, regardless of their residence. This change significantly reduced the Spanish tax burden on non-residents owning property in Spain. Furthermore, the gains will not be taxed when the property is transferred mortis causa. The extension of the inheritance and gift tax exemptions to EU residents would further change the Spanish tax landscape for these individuals. No Spanish tax would arise on the transfer of Spanish property to the decedent's spouse or children.
Case C-562/07 may also be seen as a precedent of what the Court's position might be if the matter now raised by the Commission were taken to the ECJ: the different inheritance tax treatment of resident and non-resident individuals could be considered contrary to EU Law. A legal change in the IGT provisions applicable to EU residents in respect of their properties in Spain may be forthcoming.
It is quite possible that the exemptions currently available for acquisitions by descendents and spouses may be extended at least to other EU residents. This, together with the recent legal changes regarding the taxation of capital gains, would eliminate Spanish taxes on the mortis causa transfer of Spanish real estate. In this new scenario, it might be advisable to review the structures set up in the past to hold property in Spain as they might not be the most efficient ones from a Spanish tax viewpoint.
For those who have paid inheritance and gift tax in the last four years, they may be entitled to claim a refund of the excess tax paid (as compared to the tax that a resident would have paid, which in many cases would have been nil). It may be advisable to file preventive claims for refund before a final decision is taken by the EU Commission or the ECJ, in order to avoid those claims becoming statute-barred.
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