ECJ ruling on Spanish inheritance tax

The European Court of Justice has recently delivered its judgment on the discriminatory inheritance and gift tax rules in Spain ('Impueso de Sucesiones y Donaciones' - "ISD") that require non-residents to pay higher taxes than residents (http://curia.europa.eu/juris/document/document_print.jsf?doclang=ES&text=&pageIndex=0&part=1&mode=lst&docid=157285&occ=first&dir=&cid=187684).

The ECJ judgment (case Nº C-127/12) delivered on 3 September rules that this discriminatory tax treatment contravenes the principles of freedom of movement of capital within the EU, specifically the provisions of Article 63 of the Treaty on the Functioning of the European Union (“TFEU”) and Article 40 of the Agreement on the European Economic Area (“EEA”). 

 

As a result of this judgment, Spain will have to change its inheritance and gift tax law to eliminate the discrimination between residents and non residents. 

It is likely that this will reduce the amount of inheritance tax payable in the future by non residents, at least those residing in another EU member state.

This ruling opens the door to non residents who have paid undue tax on inheritances or gifts, or who are obliged under the still current legislation to pay undue tax, to take proceedings against the Spanish state to reclaim or challenge such unduly paid or assessed tax.

There will remain uncertainties regarding the outcome of such proceedings until such time as the Spanish government passes new legislation, however clients and their professional advisers will wish to bear in mind the time limit of 4 years (from the time of payment of ISD) for bringing proceedings, and (in relation to time barred claims) 1 year from the date of the ECJ judgment (3.09.15) for an indemnity claim against the State in respect of tax provisions contrary to EU law.  

The Spanish government has announced its intention to accelerate the harmonisation of inheritance and gift tax throughout Spain. There are proposals that a nationwide band of 4%-5% will set for transmissions to direct family members, although it is possible that the rates finally agreed will be somewhat higher than this.