By Susana Lajusticia, Senior Associate, Pannone part of Slater & Gordon

The European Court of Justice ruled on 3rd September 2014 that Spain was contravening EU law, by treating residents and non-residents differently with regard to IHT, opening the door to apply for potential tax refunds and reductions.

Whether or not the beneficiary is a resident in Spain, all real property located in Spain will be subject to the Spanish inheritance tax (IHT).

IHT in Spain is payable by each individual beneficiary rather than the entire estate being taxed, as may be the case in certain countries such as England.

The level of Spanish IHT paid depends on several criteria such as the value of the estate, the degree of relationship between the beneficiary and the deceased as well as the assets previously owned by the beneficiary also located in Spain.

Spain has its central Government in the capital Madrid, but there are different autonomous communities throughout the country which have specific powers to govern and legislate within their respective territories. IHT falls within the jurisdiction of such autonomous communities.

Using these powers, numerous autonomous communities approved exemptions and nil rate IHT bands that have benefited their individual residents and, in some cases, have rendered this tax almost non-existent whilst other regions have not been so generous. Needless to say, such benevolent nil rate bands are not included within the Central Regulations of Madrid.

This effectively creates different regimes across Spain and indeed different outcomes and levels of IHT demanded.

The autonomous community of Madrid is one of the well-known so called ‘benevolent’ regional governments where IHT is discounted at 99%; whereas other regions are far less favourable. IHT charged can therefore fluctuate enormously depending on one’s place of residence, not only from a Spanish resident and non-resident perspective but also within Spanish territory itself.

Under the Central regime, which applies for non-residents, individual allowances are granted to any beneficiary. The tax rate is progressive, varying from 7.65% to a maximum of 34% and depending on the relationship to the deceased. In the case of remote relatives or non-relatives, the final amount could be even higher as the figure can be increased by up to 2.4 times.

Where the parties are residents in Spain, the beneficiary would pay IHT as above in accordance with any specific autonomous communities regulations. Whereas in the case of a non-Spanish resident beneficiary or deceased, the central regulations of Madrid would be applied when calculating IHT.

It is possible to therefore find that even within the same probate case two beneficiaries could pay a considerably different amount of IHT. For example, two brothers, one resident in Madrid and the other a resident in Andalucía, inheriting the same share of their father’s estate would find themselves being taxed differently. A similar situation arises where one beneficiary is a resident in Spain and another is a resident outside Spain.

Whilst there is no Double Taxation treaty for IHT purposes between England and Spain, we understand that in the case of the UK, HMRC gives credit against local IHT for that charged by another country on assets situated in that country so there may be some relief available.

In 2011 the European Commission brought a case on the basis of discrimination against non-residents who pay higher IHT than Spanish residents who can benefit from reductions available within the different autonomous communities where they reside. This was seen as incompatible with the EU Treaty related to free movement of people and capital and also the European Economic Area Agreement.

This case was referred by the European commission to the Courts in 2012 concluding in the European Court of Justice ruling on 3rd September 2014 that Spain was contravening EU law by treating residents and non-residents differently with regard to IHT. The European Court of Justice considered that this brought about a restriction in the free movement of capital but was not a breach of the free movement of people, as Brussels had also initially alleged.

It was also highlighted that in the previous ruling of Mattner (EU 2010), IHT differences within one member state, for example Spain, rather than between member states (eg England and Spain), are not considered to be in breach of the principle of free movement of capital.

The conclusions from the above ruling are therefore clear: it is not permissible to discriminate between residents and non-residents of Spain but different treatment arising from residency within one or other of the Spanish autonomous communities is not contrary to European law.

One issue left open is the potential application of the above European Court of Justice ruling to IHT in probate matters connected to other countries outside the EU or EEA in which a deceased or beneficiary may be resident.

We will now have to wait and see what solution Spain offers in respect to the above ruling and although one may think that the most straightforward option would be to harmonise IHT throughout the whole of the country, this could prove extremely complex and protracted owing to the autonomous communities’ status and powers. One potential option may be to simply apply the current autonomous communities IHT regulations, initially only applied to residents, to non-residents also, where assets are located in such a region. More will be known in due course once the Spanish government has had the opportunity to digest and implement this very recent EU Court ruling.

The subject may be complicated by various considerations such as the deceased’s residency, the beneficiary’s residency and the location of the assets, but it is hoped that Spain will soon be able to clarify the position and legislate on this issue.

This recent ruling opens the door for non-residents who have previously inherited assets in Spain and paid IHT, calculated on the basis of the Central regulations (without any reductions), to apply for a potential tax refund. Which criteria to apply to calculate the IHT due, together with any reductions to be applied, remains to be determined, however.

Non-resident beneficiaries of assets in Spain who are currently dealing with the Spanish probate would also have the right to claim such a refund.

Timescales apply with regard to payment of IHT in Spain. In principle, this should be paid within six months of the date of death (otherwise further charges and interest may be charged). However, a further six months’ extension can be requested within a certain fixed timescale if necessary. The penalties for non-payment within the required period are calculated according to the time delay, for instance 5% if paid within three months of the deadline, 10% within six months, 15% within 12 months or 20% plus interest thereafter.

There are now various options for dealing with the calculation and payment of IHT. A beneficiary could choose:

• To settle the IHT liability in accordance with the current regime via the Central Madrid tax office calculation and request any refund due from the sum paid, if regional regulations can be applied.
• To submit a request only (that is, no payment) to the Central Madrid tax office asking them to calculate the IHT due. Payment could be made on receipt of notification of the IHT liability, in the hope that the Government will have implemented the anticipated tax changes and applied any reductions before issuing the notification.

More news is eagerly awaited in the near future and we hope to hear very soon on the subject of the implementation in Spain of this EU Court ruling. Will this spark a flurry of tax refund applications? With luck, the application of the autonomous communities’ IHT regulations will benefit many non-Spanish residents before long but it should be remembered that the regulations of each autonomous community differ from region to region and IHT allowances may be far more generous in one region than in another. Perhaps a good (long term) point to bear in mind when deciding where to invest in Spain?