In general, with globalization, inheritances and donations from non-residents for which it is necessary to pay taxes in Spain are becoming more frequent.
In this sense, Spanish national regulations on Inheritance and Gift Tax allowed the Autonomous Communities to establish various tax reductions that were exclusively applicable in the case of a connection with their territory, limiting for non-residents regional deductions in favor of less relevant national reductions.
Thus, as an example, there were cases in which in the same inheritance where the person deceased was residing in the Community of Madrid, or whose property subject to taxation was located in said community, an heir resident in Spanish territory could apply a 99% reduction and pay 1% tax, while another heir who did not have this resident status was obliged to pay 100% of the tax liability.
- Changes by the end of 2014
The High Court of Justice of the European Union delivered a judgment on September 3, 2014, in which it ruled against Spain, determining that the Kingdom of Spain had breached its obligations under section 63 of the Treaty on the Functioning of the European Union and section 40 of the Agreement on the European Economic Area of May 2, 1992, by allowing differences in the tax treatment of donations and inheritance between residents and non-residents in Spain.
Consequently, the STJUE forced the introduction of a new Second Additional Provision, which entered into force on January 1, 2015, in the Act on Inheritance and Donations Tax. From that moment, EU/EEA residents could apply the tax benefits from the Autonomous Community with which there was a connection point. Similarly, EU/EEA residents who in previous years had paid a high tax exclusively applying national regulations were able to request and obtain the refund of tax paid in excess.
- Changes by the end of 2018
The Supreme Court has issued, among others, the decision 242/2018, of February 19, 2018, 488/2018, of March 21, 2018, and 492/2018, of March 22, 2018, on national financial liability derived from the application of the state regulations of the Inheritance and Donations Tax, contrary to the Law of the European Union. In these judgments, as a result from appeals filed by citizens residing in third countries not belonging to the EU or the EEA, Spain’s Supreme Court has determined that, in accordance with the CJEU jurisprudence, the effects of the CJEU ruling of September 3, 2014 and regional tax benefits are applicable to esidents of non-EU countries.
Thus, these decisions show recognition by the highest Spanish Court of discrimination between residents and non-residents in Spain, as previously stated by the CJEU, violating the EU Law and free movement of capital.
Consequently, as a result of these judgements, the General Directorate of Taxes (“DGT”) has modified its criteria on the ISD through its rulings V3151-18 of December 11, 2018 and V3193-18 of December 14, 2018. According to the rulings of the DGT, “in the light of the jurisprudential doctrine established by the Supreme Court and the Constitutional Court in relation to the CJEU doctrine, the exclusion of third countries outside the EEA contained in the Second Additional Provision of Act 19/1987, of December 18, on Inheritance and Donations Tax must not be taken into account.”
Therefore, the regime regulated in that additional provision will be applicable in relation to all non-residents, regardless of whether they reside in a Member State of the European Union, the European Economic Area or in a third country.