The obligation to file Tax Form 720 to declare foreign assets and rights remains in force, but the original associated fines for late filing and failure to provide sufficient information can no longer be imposed following the Court of Justice of the European Union's (CJEU) finding of a breach of the principle of the free movement of capital. Taxpayers who have been penalised in connection with Tax Form 720 should consider, on a case-by-case basis, whether they could claim a refund of the amounts paid.

There is also a tax reform proposal currently before the Spanish Parliament which would align the regime for foreign assets and rights subject to Tax Form 720 with that for Spanish assets and rights, including in respect of penalties for failure to report their existence.

Background 

As indicated in our earlier post, the European Commission initiated an infringement procedure in 2019 against the Kingdom of Spain (Case C-788/19 Commission v Kingdom of Spain) with regard to a tax form introduced in 2012 (Tax Form 720), requiring Spanish tax residents to declare assets and rights held outside of Spain.

The European Commission found that the penalties the Spanish Government approved in 2012 in connection with the failure to comply with the information obligations introduced in connection with Tax Form 720 infringed various articles of both the TFEU and the EEA Agreement (specifically those regarding the “four freedoms” of the single market). The penalties for failing to comply with the obligation to provide information on overseas assets and rights or for filing Tax Form 720 late were:

• the relevant assets being treated as “unjustified capital gains” to which a statute of limitation did not apply;
• a proportional automatic fine equivalent to 150% of the tax calculated on the value of overseas assets and rights; and
• fixed fines that were more severe than those established in the general rules on penalties for similar infringements.

Advocate General Henrik Saugmandsgaard Øe issued his opinion on 15 July 2021. He considered that the European Commission had only proved that the Spanish framework, as applied to “newly opened” bank accounts (i.e. those opened after 1 January 2016) and the fixed penalties for all assets, violated EU law.

CJEU decision

The CJEU's highly anticipated decision diverges significantly from the AG’s opinion. Mainly, the CJEU found that the penalties the Spanish Government established are contrary to the free movement of capital enshrined in the TFEU and that the absence of a statute of limitations applicable to the “unjustified capital gains” related to Tax Form 720 assets was not justified.

In reaching that decision, the CJEU first determined which of the “four freedoms” had been breached. The CJEU recalled that, when a national measure is considered to breach more than one of the freedoms of movement that the EU treaties guarantee, the CJEU will, in principle, analyse the measure in connection with only one of those freedoms. The remaining freedoms will be considered secondary in connection with that specific freedom.

In the case at hand, the CJEU found that, as the Spanish regulations pertain to owning rights and assets abroad, the freedom primarily affected was the free movement of capital and, secondarily, the freedom to provide services, the freedom of establishment and the freedom of movement of workers could also be affected.

The CJEU also found that, in principle, Member States can validly restrict the free movement of capital when justified to prevent infringements of national law, particularly in the field of taxation. Nevertheless, it is necessary to analyse whether a specific piece of legislation “goes beyond what is necessary to attain those objectives”.

Having established the freedom in which context a potential breach should be considered, the CJEU analyses each of the penalties and its impact on the specific freedom.

• The CJEU first analysed was the rule that assets and rights held abroad would be classified as “unjustified capital gains” (i.e. taxable gains) without the possibility to evidence that they corresponded to a period beyond the statute of limitations. The CJEU found that to attach such serious consequences to an administrative form intended to provide information was not proportional to the need for fiscal supervision and to combat tax evasion and avoidance as asserted by the Spanish Government.
• In respect of the fine equivalent to 150% of the tax calculated on the value of the assets or rights located abroad, the CJEU took into account the Commission’s argument that, for a specific taxpayer, failing to comply with the obligation established in connection with Tax Form 720 could potentially result in a penalty of more than 100% of the taxpayer’s assets abroad. The CJEU found this to constitute a disproportionate interference with the free movement of capital.
• Finally, the CJEU addressed whether the fixed fines associated with Tax Form 720 were disproportionate to those that would apply had the failure to comply pertained to national reporting obligations which, in the view of the Court, it was the case. As such, the fines imply a disproportionate restriction on the free movement of capital.