Inheritance taxation and free movement of capital
On May 5th, 2010 the European Commission requested that Spain change its tax rules on inheritances and donations, since they impose a tax burden which in practice is always greater when the deceased or the heirs are non-resident members or when the inherited assets are abroad.
According to the European Commission, echoing the complaints of discrimination from many non-resident heirs of capital invested in Spain, these regulations are incompatible with the free movement of workers and capital. Spain was then given a period of two months to respond to the motivated ruling published at that date.
However, the Spanish response has not been satisfactory and this past February, the European Commission has again urged Spain to change its tax regulations in matter of inheritance taxes and donations, in the form of a complementary motivated ruling. If Spain does not give a satisfactory response in a period of two months, the Commission may decide to bring the matter before the Court of Justice of the European Union.
In Spain, both the State and the autonomous communities regulate the inheritance taxes and donations, but in practice, the autonomous legislation imposes a much lower tax burden on the taxpayer than the State legislation. This discriminates against the heirs or donators of non-resident investors, since in these cases, the less advantageous State legislation applies. As a consequence, the taxpayer has to pay more taxes than if they lived in Spain or if they were donated assets located in that country.
In the case of inheritances or successions that concern properties situated in Spain, the legal modifications in the direction that the Commission expects would not only affect European citizens who seek them but would also improve the tax pressure on Spanish people themselves who, having no residence in the same autonomous community in which the assets are located , are forced to pay much higher taxes, either because the rates change from one community to another, or because the amount limits for tax exemption are much lower in some communities than in others.
Naturally, if these interpretations about free movement of capital are imposed, they will limit the sovereign power of public administrations to regulate their own taxes. The European problem between states can be transposed, as it happens in Spain, to the level of autonomies, and even to a municipal level (in the case of taxes such as the IIVTNU or plusvalía).
Carlos Prieto Cid
Tarracoiuris Lawyers Firm
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