Last Wednesday, September 3, the Court of Justice of the European Union rendered a judgment deciding on an appeal lodged by the European Commission against the Kingdom of Spain (case C-127/12) in which it concluded that the provisions in the Inheritance and Gift Tax Law on distributing legislative power between the central government and the autonomous communities are contrary to the principle of free movement of capital that governs the relationships between the EU member states.
The judgment has corrected an obvious difference in treatment that existed between Spanish resident and non Spanish resident heirs or recipients. Residents could benefit from the reduced rates, credits and reductions approved by the various autonomous communities, whereas nonresidents were subject to the taxation established in the central government law.
Because of the large number and size of the credits and reductions in the laws of the various autonomous communities which are not mirrored in the central government law, the current provisions determine that the tax on the same inheritance or gift can vary significantly according to where the taxpayer has their residence.
In the Balearic Islands, for example, there are reductions or credits for inheritances from parents to offspring, grandchildren or spouses that can reduce a person’s tax liability by up to 99%, which means that, if both deceased and heir are Balearic Island residents, inheritances between these types of family members are taxed at an effective rate that will not go above 1%.
In gifts between these types of family members (ascendants, descendants or spouse), where these family members are Balearic Island residents, applying a specific tax credit for these cases in the Balearic Island law will ensure that the effective tax rate will not go above 7%.
In both these cases, because the reductions and credits are not provided in the central government law, if the deceased or the heir in an inheritance or the recipient of a gift is not a Balearic Island resident, the effective tax rate can be up to 40%.
It is therefore clear that, unjustified, discrimination is experienced, in some cases, by nonresident heirs or recipients with respect to residents in some autonomous communities such as the Balearic Islands.
The unfairness implied by the same economic capacity giving rise to varying taxation according to the residence of the deceased, the heir or the recipient was the reason for the European court’s conclusion in its judgment that the Spanish law in relation to this point constitutes a restriction on the free movement of capital.
As a result, to implement this judgment, any nonresident taxpayers in the Balearic Islands who have paid inheritance and gift tax in an amount higher than they would have paid had they been residents may file a request with the Spanish tax authorities for the refund to which they are entitled.