In October 2009 the European Court of Justice made public its judgement in the case C-562/07, (Commission -v- Spain), in which it was ruled that the prohibition of the Spanish Non Resident Income tax Act was contrary to the freedom of movement of capital within the European Union. This judgement resided on the fact that the taxation of capital gains obtained by non-residents was set at 35% flat.
The above capital gains taxation for non-residents was found discriminatory in relation to the taxation for residents in Spain who were taxed at 15% flat rate for long term capital gains, and between 15% and 45% for short term capital gains. The decision by the European Court of Justice implied that non-residents were entitled to claim reimbursement of the overpaid amount in relation to properties sold between 2004 and the end of 2006.
A similar situation occurred in October 2011 when the European Commission referred Spain’s inheritance & gift tax to the European Court of Justice, once again highlighting that non-residents, in certain regions, are required to pay a much higher rate than residents.
The Commission believed that these regulations constituted "an obstacle for the freedom of movement of personal and capital in breach of the Treaty for the commissioning of the European Union".
In light of this, it is of little wonder why Spain was referred to the Court for violating a core tenet of the modern European political economy.
Inheritance and gift tax in Spain is regulated by the National Parliament and by some of the regional legislative bodies. Most of the Spanish regions implemented amendments to the general regulation for tax payers who are residents and have their estates within their boundary.
For example, if an estate is in Andalucía and both the deceased and the beneficiary of the inheritance are resident in that region, no inheritance tax would be payable for the surviving spouse and children of the deceased up to a value of the estate of €175,000; whereas a non-resident would just have a personal allowance of approximately €16,000. The inheritance tax payable for the surplus runs according to a sliding scale rated between 7.65% and 34%.
In the many other regions such as Asturias, Balearic Islands, Canary Islands, Cantabria, Catalonia, Aragon, Galicia, La Rioja, Madrid, Murcia, Valencia and Castille/Leon, the residents’ treatment is much more beneficial than the applicable one to non-residents and the personal allowances for close relatives have been increased up to €275,000.
Although the Commission’s inheritance tax claim is indeed more complex than the capital gains related case, due to the wide range of regional laws that may apply, it can reasonably be expected that the European Courts of Justice will decide that the rules issued are indeed in breach of European Law.
If and when this decision is made it would not immediately improve the situation of those non-residents who have had to settle their inheritance tax liabilities at the higher rate. A claim must be issued, with interest accrued, to ensure that it does not fall over a limitation date, which are in Spain restrictive. This is four years in Spain.
In May and July of 2011, the Spanish Supreme Court ruled that the non-discrimination principle applies for any type of tax, specifically referred to discriminatory taxation to non-residents in comparison to resident tax payers. This precedent will no doubt open the door to claims from individual non resident tax payers based on the same grounds included in the Commission claim before the European Court of Justice gives its decision.
It is therefore imperative that people who have paid any inheritance tax in the last four years seek independent advice in order to check the particular circumstances of their matter and, if this falls within the scope of the case referred by the Commission to the European Court of Justice, commence a claim for the refund of the overpaid amount without delay.