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Inheritances and gifts from residents outside the EU and EEA. Changing case law in sight?

| News | Anti-Trust Law and European Union Law / Tax

The Supreme Court has allowed an appeal filed by the State Attorney's Office to be processed and which will once again analyse the compatibility of the real obligation of the Inheritance and Gift Tax (ISD) with European Union law

Expansión | The Order of the Administrative Chamber of the Supreme Court of 12 December 2018 (Appeal 6314/2018) (hereinafter, the "Order") has allowed an appeal filed by the State Attorney's Office to be processed and which will once again analyse the compatibility of the real obligation of the Inheritance and Gift Tax (ISD) with European Union law, specifically in situations affecting citizens who are not resident in the European Union or in the European Economic Area (third countries).

Let us recall briefly the question that had arisen in relation to this Tax. In general and in a very simplified manner, in internal cases of  mortis causa or inter vivos acquisitions, when a resident in Spain receives an inheritance or a gift, the applicable regional regulations usually provide for a series of deductions or bonuses depending on various factors, such as, for example, the degree of kinship with the transferor, the amount received or his pre-existing assets.

However, in certain cases in which a non-resident is involved, state (not regional) regulations apply and these regulations do not provide for any type of tax benefit. This gave rise to a different treatment between residents and non-residents that the European Commission (guardian of the EU Treaties) denounced and that the High Court of Justice of the European Union (TJUE) concluded was discriminatory: if both residents and non-residents may be subject to the tax, the situation of both is objectively the same and hence Spanish law cannot contemplate unequal treatment for this mere act without infringing the right to free movement of capital of the Treaty on the Functioning of the European Union (TFEU) according to the Judgment of 3 September 2014 (Case C-127/12).

The Spanish legislator reacted to the declaration of non-compliance by introducing, barely two months later, a second Additional Provision in the Law on Inheritance and Gift Tax (Law 26/2014) which sought to correct the discrimination assessed by the ECJ, but only with respect to residents in the European Union and the European Economic Area, thus excluding residents in third countries. The same adaptation to EU law operated in the area of Wealth Tax that affects non-residents for their assets and rights located in Spanish territory.

The Doctrine immediately warned of the inadequacy of this regulatory amendment since, under EU law, the free movement of capital also applies to relations between Member States and third countries. The Supreme Court received the first appeals filed by residents of third countries who had been dismissed for their claim for liability for the application of a discriminatory rule contrary to European law and this issue was resolved a few months ago by Section 5 of the Supreme Court, which has jurisdiction in matters of liability, concluding that it could not discriminate against residents of third countries (SSTS 242/2018 of 19 February 2018 and 488/2018 of 21 March 2018). In order to reach this conclusion, the resolutions cited analysed the European jurisprudence dictated in relation to the application of article 56 TFEU to residents in third countries and after concluding that it understood that there were no compelling reasons of general interest that would allow the restriction to be understood as justified by Spanish legislation with respect to those countries, it added that the Administration had not even put forward this argument, as it had merely pointed out that European law did not apply to residents in third countries.

Both judgments are from Section 5, which is responsible, among other things, for appeals for patrimonial responsibility of the State legislator. However, the Order that is the object of this commentary admits an appeal in cassation that deals with the legality of the tax settlement to which the "discriminatory" rule had been applied and therefore, competence by reason of the subject matter of Section 2 of the 3rd Chamber.  An argument that is considered by the Admission Order that, based on the specialized nature of Section 2, claims that it is up to the latter to dictate jurisprudence. It will thus be understood that the objective interest of the appeal focuses on the need to qualify, clarify or correct the existing case law, clearly alluding to the two cited judgments of the other Section that had been considered by the Court of Instance to annul the liquidation. A criterion of specialization that was invoked, very recently, by dissenting individual votes to the Judgment of the Plenary of the Supreme Court 1670/2018 (Appeal 1049/2017) that modified the doctrine established by the Second Section in relation to article 68.2 of the Regulation of the Transfer Tax and Stamp Duty.

Consequently, the Order seems to open the door to a change in the case-law, which does not fail to attract attention for a number of reasons. Firstly, because of the times. As we have explained, the jurisprudence of Section 5 consists, among others, of two judgments of 19 February 2018 and 21 March 2018. It is not easily defensible that, just a few months after these pronouncements, it is necessary to revise this doctrine, unless it is concluded that the Admissions Section has not succeeded in fulfilling the coordinating function it is called upon to perform and which justifies its composition and the rotating nature of its members.

Secondly, and going into the substance of the case, it is the ECJ itself that should decide on this matter. The logical thing would then be for Section 2 to make a preliminary question to the Court, asking whether it is in accordance with EU law for the Spanish Inheritance and Gift Tax law to treat residents of third countries differently. But, in that case, there would be the paradox that the Supreme Court would be making a preliminary ruling on a question that the Administrative Bench of the Supreme Court itself would have already resolved.

Moreover, in the light of the case-law of the ECJ, it does not appear necessary to formulate such a question for a preliminary ruling. In a case relating to the acquisition mortis causa of a property situated in Germany by a Swiss resident, the ECJ has already concluded that the German legislation was contrary to European Union law in its judgment of 17 October 2013 (Case C-181/12), which leads us to reconsider why this appeal has been allowed and what clarification, nuance or amendment is necessary. 

In short, let us hope that this appeal for cassation will be resolved as soon as possible since its mere existence could raise doubts about the possible lack of internal coherence in the tax jurisprudence of the Supreme Court and reminds us of recent episodes of lack of legal certainty that we all want to forget.


You could read the article in Expansión.

For further information, please contact:

Javier Vinuesa

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