The Spanish courts and tax authorities have recently issued several judgments and rulings of potential interest to high net-worth individuals (HNWI) with economic ties to Spain. As opposed to the legislative measures included in the recent tax reform that we covered in our prior post (which generally resulted in higher taxation and compliance complexity), the new criteria offer promising news in relation to the taxation of non-resident individuals.
End of the discrimination of non-residents with regard to the Inheritance and Gift Tax
The discrimination of non-resident individuals with regard to the Inheritance and Gift Tax (IGT) and Net-Wealth Tax (NWT) resulted in a long-standing legal dispute that was largely resolved by the European Court of Justice (CJEU) decision in Case C-127/12. The CJEU held that non-residents’ lack of access to the more favourable tax regimes approved by the Spanish autonomous regions contravened the freedom of movement of capital. The differences between the NWT and IGT regimes in autonomous regions were quite remarkable: for instance, the regulations in Madrid and Andalusia established general 99% IGT allowance in specific cases. However, non-Spanish-resident individuals holding investments in Spain or acquiring assets by inheritance or gift were compulsorily subject to State legislation (which ultimately resulted in higher taxation). The CJEU found that limitation contrary to EU law.
Following the CJEU’s decision, the Spanish parliament amended both the IGT and NWT Laws to allow EU and EEA tax residents access to the tax benefits granted by the legislation of the autonomous regions, whilst - strikingly - excluding residents of third states. This is surprising as, pursuant to the Treaty on the Functioning of the European Union (TFEU), the freedom of movement of capital is not merely reserved for EU/EEA residents and, according to the literal wording in which the freedom is enshrined, applies to legal and natural persons of third-party States.
The Spanish Supreme Court recently confirmed this principle: the TFEU prohibits not only restrictions on the freedom of movement of capital between EU Member States but also between EU Member States and third-party countries. Therefore, the Supreme Court concluded, preventing residents of third-party (non-EU/EEA) countries from applying IGT benefits available to residents in EU/EEA Member States is also contrary to EU law.
As a result of the Supreme Court’s decisions, the Spanish tax authorities issued various tax rulings and the Bill Law on Measures to Prevent and Combat Tax Evasion (currently in parliament) has extended the right to apply IGT regional regulation to all non-Spanish residents.
Nevertheless, the discriminatory treatment of residents in third-party States is still present in the Spanish legislation, both for NWT purposes and, more broadly, in situations concerning Non-Spanish Resident Income Tax, such as the exemption applicable to interest or capital gains derived from the transfer of moveable assets (other than land-rich companies).
Is the indirect ownership of properties in Spain (through non-Spanish entities) subject to NWT?
Spanish NWT applies to non-resident individuals who own assets and rights located in Spain. In particular, HNWIs could be subject to this tax if they own real estate in Spain or shares in Spanish companies.
In recent years, whether or not the indirect ownership of properties in Spain through non-Spanish entities is also subject to NWT has been a matter of significant debate. On a literal interpretation of Spanish NWT regulations, shares held by non-resident individuals in a foreign entity that, in turn, owns a property in Spain, are not located in Spain and, hence, are not taxable for NWT purposes. The Spanish Directorate General of Taxation (DGT) nevertheless argues, on (debatable) grounds of non-discrimination, that indirect ownership through non-resident intermediary companies (whether or not tax transparent in the country of residence) should be taxed in the same way as direct ownership of the property – provided that the applicable double tax treaty permits such taxation (as do, for instance, the tax treaties that Spain has ratified with Germany and the UK).
The DGT’s latest binding ruling on this matter (V3178-19), which analysed the taxation of a non-resident individual who owned a Gibraltarian company that, in turn, owned shares in a Spanish company whose only asset was a property in Spain, concluded that a non-resident individual holding shares in a foreign company cannot be subject to Spanish NWT, regardless of the provisions of the applicable tax treaty.
The High Court of Justice of the Balearic Islands confirmed this interpretation in a decision handed down on 3 December 2020. The structure in that case was nearly identical, although both the individual and the foreign company were resident in Germany for tax purposes. The High Court declared that the non-resident individual was not subject to NWT in Spain, despite the tax treaty between Spain and Germany permitting this potential taxation.
Although this issue will likely need to be definitively settled by the Spanish Supreme Court, these decisions are positive in the sense that they provide some semblance of legal certainty on the tax treatment of foreign investments in property in Spain, being grounded on a literal interpretation of the NWT regulations.