The tax reform will put an end to the discrimination suffered by non-residents as regards inheritance and donations tax. That is how it is described in an amendment presented by the PP Party in Parliament. The change in regulations being proposed, which has been given the green light by the Tax Office, is in line with the ruling by the European Court of Justice, which ruled that Spanish legislation was contrary to Community regulations. Inheritance and Donations Tax is a tax over which the regional governments have a great deal of power and they have established discounts and deductions. However, when the tax payer is a non-resident, his tax bill is higher because state legislation, with fewer tax benefits, is applied. In the eyes of Brussels, there is no justification for this discrimination and therefore they order that the legislation of the corresponding Autonomous Region should be applied to non-residents. This means that if a German inherits a property in the Balearic Islands he will be taxed in the same way as those who are resident in that Autonomous Region. These measures also benefit those resident taxpayers who, for example, inherit an asset situated abroad.
This situation of discrimination also occurs in relation to Capital Gains Tax, where some Regions have established tax benefits which are not applicable to foreign people. The tax reform also corrects discriminatory treatment here, in preparation for a possible ruling against this from the European courts.
The change brought in by this Tax reform Nº 3 has been brought about by the ruling by the European Court of Justice on September 3rd 2014. It deals with discrimination against non-residents in Spain who must pay the ISD (Inheritance and Donations) tax compared to those residents who live in the regional communities where the property received is located, or where the residents live or lived. The change brought in now might well be important depending on the part of Spain in question since, from now on, non-resident Europeans (those residing in the 28 countries of the EU, plus those living in Liechtenstein, Norway and Iceland) have the right to the same tax benefits as residents. The change is of interest to 3 different groups:
• Non-residents of Spain with properties and other assets in Spain
• Those who, as non-residents, have received an inheritance or donation in the last few years
• Residents in Spain (regardless of nationality, but who must be nationals of a EU country) who have received or are going to receive an inheritance or donation from abroad while they lived or are living in Spain.
We now find ourselves in a very similar situation to the one we had when Spain was forced to change the regulations on the tax which was paid by non-residents for capital gains obtained in Spain (residents had, until then, paid 15% and non-residents 35%). Spain not only changed the discriminatory Law but was also forced to refund the difference between the 35% and the 15%, which led to large refunds being paid by the Spanish state.
With Law 26/2014 Spain did away with this discriminatory treatment towards non- residents and those who were adversely affected by that discrimination now have the right to request a refund from the Spanish tax authorities. The only thing which is not clear is whether it will only be possible to request a refund for ISDs which have not expired (the expiry period in Spain is 4 years) or if it can also be done for those which have expired (which was not possible in the case of expired capital gains tax which we mentioned earlier).
Regardless of the applicable regulations, which cases fall under the jurisdiction of the State?
In the case of “mortis causa” inheritances:
• When the originator (the deceased) is a non-resident.
• When the successor (inheritor) is non-resident in Spain although the originator is a resident.
In “intervivos” inheritances (Donations):
• Donations of properties abroad when the tax subject is a resident (if they are non-resident, they are not subject to the tax in Spain).
• Donations of properties in Spain when the tax subject is a non-resident
Which regulations apply from January 1st 2015?
We would have to identify several different cases depending on whether the assets are acquired through inheritance or donation, according to the place of residence of the originator and the successor and according to where the transferred assets are located.
“Mortis causa” inheritances
a) Originator resident in Spain
• If the successors (inheritors) are Community residents, resident in Spain or in another country of the EU or the European Economic Area, they are subject to the regulations of the Autonomous Region in which the originator resided.
• If the successors are not Community residents, that is to say, they reside in a country other than those which make up the EEA, they will be subject to state regulations.
b) Originator from within the EEA but not resident in Spain
• If the successors are Community residents, residents in Spain or in any other country of the European Economic Area, the values of the assets situated within each Autonomous Region will be added together and the regulations of the Autonomous Region with the assets of greatest value will be applied. If there are no assets in Spain, only those successors resident in Spain would be liable for tax in the Autonomous Region in which they reside.
• If the successors are not Community residents, that is to say, they reside in a country other than those which make up the EEA, they will be subject to state regulations.
c) Originator resident in a state not included in the EEA
• The successors will be subject to state regulations regardless of whether they are resident or non-resident in Spain (Community or Non-Community).
“Inter vivos” inheritances or donations
There are differences depending on where the assets are situated and where the tax subjects are resident:
a) Donations of assets situated in Spain
• Tax subject resident in Spain: Pays tax in the Autonomous Region where the property is located applying the regulations in force in that Region. For assets other than real estate, tax is paid in the Region and under the regulations of the Region where the tax subject is resident.
• Tax subject residing in the EEA but not in Spain: falls under the jurisdiction of the State but the regulations of the Region where the property is located will be applicable. For other types of assets, other than real estate, the regulations of the Region in which the asset has remained for the greatest number of days during the 5 years prior to the due date of the tax will be applied.
• Tax subject residing outside the EEA: is the jurisdiction of and will be governed by the regulations of the State.
b) Donations of assets situated in a EU or EEA state
• Tax subject resident in Spain: The tax is the jurisdiction of the State, but is paid according to the regulations of the Autonomous Region where the person receiving the asset resides.
• Non-resident tax subject (Community or non-Community): Logically he is not liable for paying the tax in Spain.
c) Donations of assets situated in a state which is not part of the EU or the EEA
• Tax subject resident in Spain: is the jurisdiction of the state and the regulations of the State are applicable.
• Non-resident tax subject (Community or non-Community): Not liable for paying the tax in Spain.