On 3 September 2014 the European Court of Justice (“ECJ”) ruled that Spanish inheritance tax law discriminates against non-residents (European Commission v Kingdom of Spain, ECJ C-12712). The European Commission (“EC”) took the matter to the ECJ following previous requests for Spain to correct the position as it was contrary to EU non-discrimination provisions.
The EC originally requested that Spain correct the position back in 2010 but no action was taken by the Spanish government. As a result the matter was referred to the ECJ in 2011 culminating in the ruling given earlier this month.
Inheritance tax in Spain is broadly determined by reference to three factors:
(I) Value of assets transferred
(ii) Relationship with the transferor
(iii) Recipients wealth
Inheritance tax is regulated at national level where there is no discrimination against non-residents. However, devolved powers given to regional governments have been exercised which give Spanish residents additional reliefs which allow them to pay much lower amounts of inheritance tax. It was this discrimination which was the subject of the case before the ECJ.
In giving their ruling the ECJ noted in particular that by permitting a different tax treatment for non-residents Spain had not “met its obligations under articles 63 TFEU and 40 of the EEA Treaty of 2 May 1992”.
It is important to note that the ability for each region to have its own inheritance tax code is not by itself a cause of discrimination. The discrimination is solely due to regions applying a different treatment to non-residents.
The Spanish government is now considering how to bring its tax laws into line with the ruling. This could prove challenging given Spain’s highly devolved political system.
This ruling is welcome news where an inheritance or gift may pass between a Spanish resident and non-resident as the Spanish inheritance tax position is likely to change significantly. Those potentially affected should therefore review their Spanish inheritance tax position going forward once any changes have been confirmed.
However consideration is also needed where Spanish inheritance tax has been paid over the last 4 or 5 years (typically the period laid down by the Spanish statute of limitations). Here the position should also be reviewed to determine whether or not there is an entitlement to a refund as a result of past discrimination.