Changes to Spanish Inheritance Tax for Non-Residents

  • Oliver
    Oliver is a multidisciplinary lawyer and economist with over 10 years in the banking sector. With a very high level of written and spoken English, Oliver specialises in: Property Conveyances, Inheritance, Family Law, Criminal Law, Tax Law and Contractual disputes.

Until the 31st of December 2014, with regard to Gift & Inheritance Tax, European Union citizens not ordinarily resident in Spain have suffered a discrimination under Spanish law compared to European Union citizens who were resident, the former not being able to avail of extensive deductions and exemptions that substantially reduced the amount of tax payable in respect of inherited assets. 

The cause of the discrimination was that when either the deceased or the beneficiary were not residents in Spain, they had to follow the tax rules laid down at the State level, which did not contain many of the substantial tax deductions available at the regional level. However, on January 1st, 2015, Law 26/2014 entered into force and this modified the existing legislation, specifically Law 29/1987. The new legislation was drafted as a result of the decision of the European Court which decided that Spanish inheritance laws infringed on the free movement of capital (Article 260 TFEU) as a result of the differences in the fiscal treatment of gifts and inheritances between residents and non-residents in Spain.

Special Tax Regime

With the entering into force of the new legislation on January 1st, 2015, a new special tax regime has been introduced for non-resident EU citizens, that is to say, EU citizens not resident in Spain, but resident in the European Union, may apply the Spanish regional tax rules as have residents in Spain before the new law, thus making the treatment equal in both cases.

In relation to EU citizens the new legislation establishes that , if the deceased was not resident in Spain , heirs not resident in Spain can apply the rules of the Autonomous Community in which the majority value of their assets are located. If the heirs are resident in Spain , the rules of the Autonomous Community where they reside shall apply. If the deceased had been resident in a region of Spain and the heirs are not resident in Spain , the non-resident heirs will pay their inheritance tax under the rules of the Autonomous Community where the deceased resided.

Following the above explanation it would appear to be the case that new problems may be posed in the future, such as on the death of a person resident outside the EU , whereby heirs that are EU citizens resident in Spain will continue liquidating their inheritance tax under the less generous state rules, and thus maintaining discriminatory treatment.

Neither does the legislative amendment make any ruling on its retroactive nature, so I understand that it is not possible to apply the new rules to taxable transactions incurred prior to January 1 , 2015. In my opinion the new rules could not be applied retroactively as if this was the intention of the legislators, it should have been expressly declared to be retroactive. In my opinion the new rules should have been given retroactive effect , since the judgment of the ECJ declares the supervening invalidity of the rule infringed , with effect from the time that the Court’s judgment was handed down. This should envisage the unenforceability of the old tax discrimination to anyone affected.  Despite this, after telephone contact with the Non-Resident Tax Agency in Madrid , it seems that they are accepting the application of the new rules for accruals prior to January 1, 2015 , although this is something we must continue to monitor.

Autonomous Communities and Competitive Tax Regimes

It is worth remembering that inheritance and gift  tax collection in Spain is devolved to the Autonomous Communities, so these latter have been free to set their own rules.

The amount of inheritance tax payable by EU citizens resident in Spain varies considerably depending on whether the taxpayer is residing in one region or another. In fact this has initiated a tax “war” between the Spanish Regions for the purposes of this tax , because there are people who have taken up residence in Autonomous Communities with more favorable treatment whereby beneficiaries pay less tax on inheritance and donations , especially those with highest valued estates.

So, we are now seeing this issue currently pending judicial interpretation and already there have been some judicial rulings relating to discrimination in Spanish territory between residents of different Autonomous Communities on the basis of having to pay more or less tax.
As an example, the most famous case lately in Andalucía has related to the death of the fabulously wealthy Duchess of Alba, because although she has always been linked sentimentally and emotionally to  Andalucía, apparently her “fiscal heart ” belonged to Madrid, which according to some media sources, was extremely advantageous for her heirs, thereby saving more than 90 million euros in inheritance tax .

Since now non-resident EU citizens will also enjoy the more generous rules for inheritance tax previously applied only to residents, and since the regulations of the Autonomous Community in which the majority value of the assets of the estate are located shall apply, the difference in tax rates and deductions etc by the the various Autonomous Communities may well become an important consideration for estate planning in the future.

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