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For a number of years, taxable persons owning assets and rights abroad have had the obligation to file an information return (form 720). The first return was filed in 2013, in relation to the assets and rights owned by taxable persons as of the 2012 year-end.

Procedural penalties may be levied for not filing or filing the returns late (per item of information or set of items of information not reported or reported inaccurately); and additionally the value of any unreported assets may be treated as an undisclosed increase in assets and rights for personal income tax purposes (or unreported income for corporate income tax purposes). The economic effect may therefore end up being as high as the value of the foreign assets themselves, after adding to the tax on those types of income the penalty set out for these cases, amounting to 150% of the liability for those taxes.

The disproportionate nature of this penalty system has been examined by the European Commission, which, in November 2015, sent a letter of formal notice to the Spanish authorities on the possible incompatibility of this system with EU law. Later, in February 2017, the Commission issued a reasoned opinion concluding that Spain has breached its obligations under articles 21, 45, 49, 56 and 63 of the Treaty on the Functioning of the EU and articles 28, 31, 36 and 40 of the European Economic Area Agreement. In the opinion, the Commission calls on Spain to adopt the necessary measures to adapt its legislation in two months from its receipt, a call which, until now, had not been heeded.

The Spanish courts now appear to be making a move after a judgment rendered on November 28, 2018 in which Castilla y León High Court concluded that the penalties for the late filing of form 720 are null and void as a matter of law. The court underlined that these penalties are disproportionate where the taxpayer files the return voluntarily, even if it is late, and added that it is not allowable either to impose penalties automatically without mentioning the European Commission proceeding, which had already started when the penalty was imposed.

Interestingly, the court observed a defect in the penalty proceeding because it was commenced outside the three month period envisaged in the law which is calculated from when the fact triggering the infringement was known.