Claiming Back Spanish inheritance Tax for non-residents.
On September 3rd 2014, the EU court of justice ruled a judgment C-127/12 against Spain. Specifically the EU court stated that Spain has a discriminatory inheritance and Gift tax, that makes non-residents pay higher inheritance taxes than residents or Spanish citizens. This breaks articles 21 and 63 of the Treaty on the functioning of the European Union and articles 28 and 40 of the European Economic Area rules.
Present Spanish inheritance tax rules.
Spanish law establishes precisely how to calculate the tax base and the assets to be taxed. Additionally the law empowers autonomous communities to apply tax rebates and discounts. As a result Spanish inheritance and gift tax varies dramatically depending on the region where the assets are located, the place of residence of the heirs and the place of residence of the deceased.
Spanish inheritance law is regulated both at the state and at the autonomous region levels and differentiates between the heirs who are fiscal residents in Spain and those who are not. In this context regional law applies only to residents.
If the heir is not a fiscal resident in Spain he will have to pay an “impuesto por obligación real” which means that he will have to pay Spanish inheritance tax only on assets located in Spain. However, contrary to autonomous communities’ laws, state legislation does not award extensive tax benefits leading to a higher taxation for non-residents. A sliding scale will be applied to the total assets inherited that will result in a taxation level between 7.65% and 34%. There will be minor reductions on the taxable base for specific conditions, for example direct descendants will benefit of a reduction of 15,956.87€.
If the heir is a fiscal resident in Spain, he will have to pay an “impuesto por obligación personal” which means that he will have to pay Spanish inheritance tax on the full assets legated, regardless of whether they are on Spanish territory or abroad. Additionally he will benefit from extensive tax rebates from the autonomous communities, radically decreasing the taxation level (making in some cases the inheritance tax free). For example in Andalusia if both the deceased and the heir are fiscal residents and have their habitual residence in the same property, the inheritance of that property will benefit from a 99.99% reduction. Additionally there is a reduction of 175.000€ for spouses or direct descendants (the list of reductions is very long). In many other autonomous regions exemptions are even more generous for example in the Balearic region direct descendants inheritance is taxed at 1% flat.
In the future Spain will have to change its laws in order to harmonize inheritance and gift tax for residents and non-residents. It is still not clear how this will be done, but it looks like autonomous regions regulations will be extended also to non-residents.
Filing a claim
The ruling from the EU will allow non-residents to claim back the difference between the inheritance tax they paid according to state law and the applicable autonomous community law. Since there is a limitation period after which actions cannot be taken, you can file a claim only if you paid the inheritance tax less than 4 years ago.
Our recommendation is to contact a lawyer specialized in taxation a claim back the difference, you will need to provide the inheritance deeds, the taxes paid, and a bank certificate of your account; it may take some time before the tax is returned to your bank account, but it is worth the effort.