The Supreme Court has reinforced the Tax rights of non-residents with assets in Spain

Executive Summary

The Supreme Court has recently recognised the primacy of the European Union law by not applying national tax rules which discriminate against non-Spanish residents.

Article 31 of the Wealth tax law establishes an upper limit to the tax liability that was previously only applicable to Spanish residents, which permits a tax reduction of up to 80%.

In a ruling originating from an appeal made by a Belgian taxpayer in 2020, the Supreme Court confirmed that non-residents of Spain cannot be excluded from the joint limit between Personal Income tax and Wealth tax.

That is, according to the Supreme Court, the Spanish law which has so far impeded the application of the limit to non-residents, which violates the free movement of capital as recognised by article 63.1 of the Treaty on the Functioning of European Union.

Regulatory context

European framework: Article 63.1 of the TFEU prohibits restrictions on the free movement of capital between EU Member states and between other Member states or third countries. The case law of the Court of Justice of the European Union considered the tax laws to be restrictive, as they disincentivised foreign investment by treating it less favourably than domestic investment.

Relevant case law: The ruling of the Court of Justice of the European Union on the 3 September 2014 (Comisión/España, C-127/12) declared the Spanish Inheritance and gift tax regime in relation to non-residents to be discriminatory, leading to reform through Law 26/2014. The current Supreme Court relies on this consolidated case law framework to declare the violation in the area of income tax and wealth tax.

National legislation affected: Article 31 of the Wealth tax law and the rules regarding the integration of Personal income tax with Wealth tax (a limit of 60%, with a maximum reduction of 80% regarding the Wealth tax liability) had previously only been applied exclusively to Spanish residents.

Legal criterion of the Supreme Court

1. The Supreme Court considers that residence (whether in Spain or abroad) does not, in itself, justify differential treatment that prevents non-residents from applying the limit against confiscation which is provided for in the Wealth tax law.
2. It reiterates that the doctrine of the Court of Justice of the European Union is sufficiently established that it is not necessary to refer the matter for a preliminary ruling in these cases. The direct application of EU law allows the discriminatory Spanish rule to be disregarded.
3. The Supreme Court also declares that there exists a violation of the principle of free movement of capital when national tax legislation makes cross-border investment less attractive, or imposes different tax burdens on taxpayers in objectively comparable situations.

Practical impact

For non-residents with assets and income in Spain:

• You may request that the joint limit be applied in order to avoid joint taxation that is deemed confiscatory.
• Self-assessments and penalties based on the Administration’s prior refusal to recognise this limit are subject to challenge on the grounds that they violate EU law.

Why it is relevant

The Supreme Court’s decision reinforces the primacy of European Union law in tax matters and limits the Administration’s room for manoeuvre in establishing different tax burdens based on residence.

We recommend reviewing the wealth tax returns of non-resident taxpayers to determine whether the application of the aforementioned joint limit would have resulted in a lower tax payment.

This protects the rights of foreign investors and reduces legal uncertainty, particularly in territories with a significant presence of non-residents. At Seegman, it allows us to appeal and review tax planning affecting non-residents.