Tax On Inheritances And Donations For Non-Tax Residents In Spain
This article was written exclusively for Expat Network by B LAW & TAX, International Tax & Legal Advisors
The Spanish Inheritance and Donation Tax (“Impuesto sobre Sucesiones y Donaciones”) applies to transfers either as a donation or as an inheritance. In both cases, the taxpayer will be the beneficiary – the person who receives those goods or rights for free.
Firstly, taxpayers who are residents in Spain are subject to this tax on assets and rights received from anywhere is the world. However, those who are not tax resident in Spain are only subject to this tax on assets and rights located in Spain.
In Spain, the treatment of the Inheritance and Donation Tax for non-tax residents used to have some different rules. Until recently, a tax resident in an EU country had considerable advantages compared to non-EU tax residents. Those who were resident in a European Union (EU) country could apply the Regional Law instead of the State Law. This would give a significant economic advantage since, generally, Spanish Regional Laws allow important deductions or benefits (e.g. Madrid Region has established a tax benefit up to 99% of the quota).
On the other hand, those who were resident outside the EU were obliged to apply the State Law, without being able to take advantage of the benefits included in the Regional Laws. However, recently, the Spanish Supreme Court has taken a stand against this difference in treatment and has given three rulings on this issue (on February 19th, 2018, on March 21st, 2018 and on March 22nd, 2018).
The Hight Court ruled that the differentiation between European or non-European tax residents was a restriction on the free movement of capital. Recently, two new binding rules of the Spanish Tax Office (on 11th December 2018 and on 14th December 2018) have reinforced the approach of the High Court and confirmed that, according to EU Law, it is not possible to distinguish, for tax purposes, between European or non-European tax residents.
The new case law has resulted in a regulation more consistent with EU principles by allowing residents outside the EU to apply the tax benefits established by the Regional Law instead of the State Law.
Below, we set out the principal changes to the applicable law, due to the new rulings issued by the Spanish Supreme Court, depending on the type of free transfer (inheritance or donation).
Notwithstanding the above, it must not be forgotten that Spanish Law has not yet been changed and – at least today – there is no confirmation that there is going to be any change in the short term.
INHERITANCE
According to the tax residence of the testator we can distinguish between the following cases:
a) Non-Tax resident testator: tax resident in the EU or in the European Economic Area (EEA).
Assets and rights are located in Spain: The applicable Regional Law would be the one corresponding to the Region where the higher value of the Spanish assets and rights inherited is located.
Assets and rights are located outside Spain: The applicable Regional Law would be the one where the beneficiary is tax resident.
If the beneficiary is a non-tax resident (EU or non-European countries), they will be not liable to tax in Spain.
Under this scenario, the new rulings issued by the Spanish Supreme Court do not imply any change regarding the applicable law as the same law is applicable as before the new rulings.
b) Non-Tax resident testator: tax resident in non-EU country.
Assets and rights are located in Spain: The State Law would be applicable (regardless of the taxable person residence).
However, the Spanish Supreme Court issued rulings in 2018 which established that all beneficiaries could apply the Regional Law – the one in which the highest value of assets is located.
Assets and rights are located outside Spain: If the beneficiary is a non-tax resident (EU or non-European countries), they will not be liable to tax in Spain. For Tax Residents, the State Law would be applicable.
However, as explained before, the Spanish Supreme Court issued rulings in 2018 which established that beneficiaries could apply the Regional Law – the one in which the Beneficiary is Resident.
c) Tax Resident Testator in Spain.
When the assets and rights are in Spain and the taxpayer (beneficiary) is a tax resident in an EU country, the Regional Law is applicable. In this case, the applicable law is the one corresponding to the Region where the testator was tax resident.
However, if the beneficiary is tax resident in a non-EU country the State Law is applicable instead of the Regional Law.
This rule would have changed due the new sentences issued by the Spanish Supreme Court and they would allow the Regional Law to apply as well.
Finally, if the assets and rights are not located in Spain and the beneficiary is a non-tax resident (EU or non-European countries), they will not be liable to tax in Spain.
DONATIONS
In these cases, the relevant issues that determine the applicable law (State or Regional) are the location of the assets and rights (distinguishing between real estate and the rest of the assets or rights) and the residence of taxpayer (the recipient or beneficiary).
a) Real Estate.
Located in Spain:
If the beneficiaries are tax residents in Spain or in an EU country, Spanish Law allows them to apply the Regional Law where the real estate is located.
On the other hand, for tax residents outside the EU, the State Law is applicable instead of the Regional Law.
However, following the Spanish Supreme Court rulings, it seems that the Regional Law can be applied as well.
Located in other countries:
If the beneficiary is a non-tax resident (EU or non-European countries), they will not be liable to tax in Spain.
If the taxpayer is tax resident in Spain, and the real estate is located in an EU country, the law corresponding to the Region where beneficiary is resident is applicable .
If the taxpayer is tax resident in Spain, and the real estate is located outside an EU country, the applicable law is the State Law.
However, according to the arguments stated in the rulings from the Spanish Supreme Court it could be interpreted that the Regional Law could be applied as well.
b) Other assets or rights.
Located in Spain:
If the taxpayer is resident in an EU country, Spanish Law allows the Regional Law corresponding to the Region where the assets or rights are located to apply.
For tax residents in a non-EU country, the State Law is applicable instead of the Regional Law.
However, following the Spanish Supreme rulings, it seems that the Regional Law could also be applied.
Located in other countries:
If the beneficiary is a non-tax resident (EU or non-European countries), they will not be liable to tax in Spain.
Beneficiaries who are Spanish Tax Residents, the applicable law corresponds to the Region where beneficiary is resident.
REQUEST FOR TAX REFUND FOR PREVIOUS YEARS
Given the rules above, taxpayers who have filed an Inheritance and Donations Tax Return without applying the benefits of the Regional Laws, have the right to request a refund based on the recent Supreme Court case law .
Although Spanish Law has not yet been amended to reflect the rulings, we understand the Court rulings can be used to claim a refund.
Finally, it is important to remember that any claims must be made within four years after the deadline to submit the relevant tax return. After this period, the tax return is final and no claims can be made.