European Court of Justice Says Spanish Tax System Is in Breach of EU Treaties

Europe’s top court ruled Wednesday against Spain in a case that may force the country to lower the lucrative taxation of inheritances involving nonresidents.

The Luxembourg-based European Court of Justice said that, by applying high tax rates in cases where either the deceased or the recipient of the inheritance is a nonresident, the country is in breach of European Union treaties. In inheritances involving Spanish residents only, such rates are much lower.

inheritance tax spain

 court spokesman said Spain must comply with the ruling, but it is unclear when the country will incorporate it in its legislation. A spokeswoman for Spain’s Budget Ministry, which is in charge of tax issues, didn’t immediately respond to a request for comment.

The European Commission first told Spain to change its legislation regarding inheritance and donation tax in 2010 and, after Spain failed to comply, it brought the case before the European court.

The alleged discrimination is a result of the complex setup of inheritance tax management and collection in the country.

Spain’s regional governments manage and collect these taxes, and many regions have mechanisms in place that sharply reduce or even eliminate the effective inheritance tax rate locally.

However, regions only apply these rules in cases where both the beneficiaries and donees are local residents. When nonresidents are involved, higher rates contemplated in national law are applied.

The ruling is significant for Spain, where about 14% of a population of 46 million is foreign, one of the highest percentages in the EU.

According to a report by DMS Consulting, a local consultancy, Spain’s current legislation has led to “very serious” discrimination when it comes to the payment of inheritance taxes.

Using the example of the Balearic Islands—where 20% of residents are foreign, the largest percentage of any Spanish region, and many are elderly Europeans with children living in other countries—DMS Consulting said an inheritance tax rate of 1% is commonly applied to residents, while those involving nonresidents vary between 7% and 34%.


Article real case:

I confess. I had more than the usual journalistic interest in Wednesday’s ruling by the European Court of Justice on Spain’s inheritance law.

My father died last December, and as I grieved I knew I was facing a ton of paperwork related with inheritance. It would be a cumbersome affair because I live in Spain and he lived in Norway, meaning I had to report to two countries.

What I didn’t know but quickly learned from my Spanish tax manager was that, even if my dad never lived in Spain, the Spanish government was planning to claim a whopping 34% what he had left me—that it, 34% of his apartment in Oslo, his cabin in the Norwegian woods, his Honda pickup truck, and a portfolio of securities.

I couldn’t believe it. My father’s only relationship with Spain was the occasional trip to the Canary Islands and more frequent visits to see me and my family in Madrid. He had never engaged in any economic activity in Spain, except to pay occasional restaurant and hotel bills. And Norway, where he had paid taxes all his life, was already applying a 10% inheritance tax.

It got more confounding. I learned that Spanish law taxed non-residents and residents at different rates. Had my father resided in Madrid, as I do, Spain would have taken a mere 1% of the inheritance. Because he didn’t, they were claiming a third.

This is how the law worked: Spain’s national government set an inheritance tax on a sliding scale between 7% and 34% but gave each region authority to collect it. Many Spanish regions, including Madrid, have a compensatory mechanism that reduces or eliminates this tax altogether. But a region was allowed to apply this mechanism only when the deceased and the recipient were residents of that region. In all other cases, including mine, the national tax rate applied.

I considered packing my bags and leaving Spain. I figured that my partner, my daughter and I could live off what Spain’s taxman was claiming for two to three years if we moved back to Norway. I pay my taxes diligently in Spain and Norway, but this seemed so unfair that I was willing to consider extreme measures to avoid giving away the hard-earned wealth my dad left to a state that had nothing to do with him.

But moving away wouldn’t help. My tax manager said that because my father died in 2013, Spain could claim its share of the inheritance no matter where I lived, because I had lived and worked in Spain that year.

So I, along with others in the same situation, put my hopes in a court case that challenged the law’s treatment of non-residents. The European Commission had brought the case to the European Court of Justice. I waited in anticipation for months. Wednesday the Luxembourg-based court ruled against Spain—and in my favor.

I’m still not sure what I’ve won. Spain must comply with the ruling by changing its legislation, but it’s still unclear whether the change will affect me and bring down my tax bill.

Ignacio, my tax advisor, said the ruling was “good news!” At the very least, it should make things easier, in the future, for those who live in Spain and lose a family member who lived far away.