Discriminatory inheritance and gift tax regime for non-residents

Are non residents in Spain discriminated against where inheritance and gift tax is concerned? Are there any possibilities to ask for a refund of the taxes paid in the past?

The tax treatment of non residents in Spain concerning inheritance and gift taxes could be considered discriminatory in the UE. Is it possible to claim the refund of taxes already paid? 

In the case of mortis causa transfers, if the heirs are tax resident in Spain, the applicable law is that of the autonomous region where the deceased had his habitual residence for more days during the previous five years. However, if the deceased was not a tax resident in Spain, state legislation always applies. This means, for example, that if the deceased was a tax resident in Spain, non-resident heirs are subject to state law, while tax-resident heirs are subject to the regulations of the autonomous region. While there are few tax reductions under state regulations, autonomous regions usually have high allowances. For example, in the autonomous region of Madrid, there is a 99% allowance on mortis causa transfers between parents and children. Thus, if the deceased had his habitual residence in Madrid, tax-resident heirs would only pay IGT of 1%, while non-resident heirs would pay the full amount of IGT for the same assets received.

EU Commission decision

The EU Commission has considered that the Spanish IGT provisions are discriminating against non-residents, because they impose a higher tax burden on non-residents and on assets held abroad, thus going against the free movement of workers and capital. In February 2011, the Commission requested Spain to amend its discriminatory IGT provisions. As no amendments were made, in October 2011, the European Commission referred Spain to the Court of Justice (“ECJ”) due to its discriminatory IGT rules, considering that they obstruct the free movement of persons and capital in breach of the Treaty on the Functioning of the European Union.

This seems fair, as Spanish IGT is regulated by the state and by the autonomous regions, and the allowances in some autonomous regions (not all of them) are, as mentioned, much higher than the reductions established under state regulations. This makes IGT vary substantially depending on the applicable law.

ECJ on the German inheritance tax

In October 2013, the ECJ issued a ruling on German inheritance tax that brings to mind how Spain treats non-residents, as it also substantially lowered the tax burden of resident taxpayers compared to that of non-residents. We consider that the same arguments apply to the Spanish tax situation.

In that case (Yvon Welte v. Finanzamt Velbert (C-181/12)), the ECJ considered the German inheritance legislation to be discriminatory, as it granted a higher tax-free allowance on transfers of inheritances involving immovable property when at least one of the parties was a resident in that Member State compared with the tax-free allowance granted when both parties were non-residents.

Will the Spanish inheritance and gift tax be modified?

The EU is not the only body putting pressure on Spain to change its IGT legislation: an expert committee appointed by the Spanish government has also requested changes, particularly to reduce the difference between effective taxes in the autonomous regions.

To harmonize the tax applied and to prevent discriminatory practices, the expert committee has recommended certain modifications. It suggests eliminating reductions derived from (i) family affiliation, (ii) amounts contributed to life insurances, (ii) habitual abode, (iv) gifts and (v) the acquisition of certain assets of national heritage. However, it considers that there should be a minimum exemption, as well as only three tax rates, which would apply depending on the family relationship, but not on the amount or on the taxpayer’s preexisting wealth.

However, the tax reform announced a few weeks ago has not mentioned any change in the Spanish legislation on inheritance and gift tax.

Is it possible to start a claim for the taxes paid?

For taxpayers that have already paid IGT in Spain in compliance with Spanish state law, we understand that there are strong arguments for requesting the tax authorities to return any excess tax paid, given that Spanish IGT provisions go against the free movement of capital and workers. Thus, it is highly advisable to start the tax procedure before the statute of limitation is barred (four years from the end of the voluntary period to submit the IGT return). Refunds cannot be claimed after that period.