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The EU warns “Taxation must not be discriminatory”

In its Judgment published September 3rd, the Court of Justice of the European Union has delivered a Ruling on the appeal brought by the Commission against Spain concerning certain aspects of Spanish legislation on inheritance and gift taxation (Ley 29/1987, del Impuesto sobre Sucesiones y Donaciones).

The Judgment holds that Spain has acted in breach of its obligations concerning a restriction on the free movement of capitals prohibited by section 1 of article 63 of the TFEU, in that it enabled the establishment of differentiated tax treatment of donations and inheritance between resident and non-resident successors and the donees, between resident and non-resident testators, and between real estate donations situated within and outside Spanish territory.

The judgment is important for two reasons: firstly, in the context of free movement of capital within the European Union; and secondly, in the context of the prohibition of discriminatory measures in taxation. The fact that non-residents could not benefit from reductions and bonuses offered by the regional governments of Spain (Comunidades Autónomas) was found in breach of both the principle of free movement of capital and the prohibition of discriminatory measures. In addition, the fact that discrimination occurred not only between residents and non-residents but also depending on the place of fiscal residence of the deceased was considered a further breach of the prohibition of discriminatory measures. This situation has already been denounced vigorously by Spanish tax lawyers and taxpayers, who see no reason why their level of taxation should vary depending on the Comunidad Autónoma where they reside.

The Sentence has been published as the Spanish tax reform has already been published in the Official State Gazette (Boletín Oficial del Estado), due to enter into force on January 1st,2015. Unfortunately, this reform does not provide for any changes in inheritance and gift taxation, such that, despite improvements on some aspects, it remains an incomplete reform.

As we are left to analyze the sentence to understand its scope and its application in practice, the imminent tax reform may miss out on a great opportunity to meet the demands of residents and non-residents for more equitable taxation.

You can find the sentence via the following link:

/gestion_documental/documentos/20140903_tribunal_justicia%20europeo_sentencia_%20isd%20espan_a.pdf