A recent decision may pave the way for non-residents with assets in Spain to benefit from significant Spanish Wealth Tax reductions. The Wealth Tax ─ a rare phenomenon in European countries─ is levied on both Spanish residents, who are taxed on their world-wide assets, and non-residents, who are taxed only on assets located in Spain. However, there are substantial differences in the taxation rules applied to the two types of taxpayer, which were partly amended following a CJEU judgment that declared equivalent Inheritance and Gift Tax provisions contrary to EU law (Case C-127/12). In essence, the CJEU then held that, by preventing non-residents from applying more favourable regional tax regulations, Spanish law contravened the freedom of movement of capital (more info here).

A key difference in tax treatment is that non-residents cannot apply the so-called “tax shield”. Basically, the “tax shield” allows Spanish-resident taxpayers to reduce their Wealth Tax liability (by up to 80%) so that the sum of what they have to pay in Personal Income Tax and Wealth Tax does not exceed 60% of their annual income. In principle, this rule is not applicable to non-Spanish residents, who are not liable for Personal Income Tax in Spain. In a recent decision (appeal no. 432/2020), the High Court of Justice of the Balearic Islands ruled, based on the CJEU’s case law, that preventing non-residents from applying the joint limit for Personal Income Tax and Wealth Tax also constitutes unlawful discrimination that is forbidden by the EU law.

The court concluded that this restriction constitutes a comparative disadvantage that is contrary to the free movement of capital. In the court’s view, there is no objective reason why a resident taxpayer should be allowed to reduce their Wealth Tax liability whereas a non-resident, in the same circumstances, must pay the tax in full. The court therefore found that the joint limit should be applied taking into account the Personal Income Tax paid in the taxpayer’s country of residence (Belgium), which in this case meant that the maximum Wealth Tax reduction was applicable (80% of the Wealth Tax bill).

Although this is an isolated decision at the moment (and not binding on the tax authorities), the court’s reasoning is based on the previous CJEU judgment. If confirmed on appeal (the decision has been appealed before the Supreme Court), it would be good news for non-residents with assets in Spain, who could benefit from significant Wealth Tax reductions. Furthermore, this new interpretation might affect the new Spanish “Solidarity” Wealth Tax (analysed here).

Finally, it would certainly be worthwhile for any non-resident taxpayers who have not applied the “tax shield” to monitor how the situation develops with a view to potentially requesting a refund of the excess Wealth Tax paid for those tax years that are not time-barred (generally, the last four years).