We analyse the Spanish Wealth Tax to see if it discriminates non residents
We are going to do a review of Spanish Wealth Tax to see if it discriminates non residents that live in our country.
Law 38/2022 amends, with effect from 2022, Article 5 of the Spanish Wealth Tax law in order to tax Non-Residents on the indirect holding of real estate assets located in Spain.
This new wording is justified by the need to find a solution to “… an unjustified discrimination (…) the fact that a non-resident ceases to pay the Spanish Wealth Tax due to the fact of having a non-resident legal entity interposed in his country”.
This “discriminatory” treatment justifies taxing all NON-RESIDENTS who hold real estate assets in Spain through corporate structures.
However, there is a lack of other necessary measures to solve discriminatory situations, which occur quite frequently in the Spanish Wealth Tax, and which will occur, moreover, as a result of this change and the approval of the Tax on Large Fortunes.
We are referring to the impossibility for NON-RESIDENTS to apply the joint Income tax-wealth tax 60% limitation rule as a limit to confiscation which leads us to think that the Spanish Wealth Tax discriminates non residents.
This asymmetry, in my opinion, lacks any justification whatsoever, and should be immediately addressed by Spain, under penalty of further appeals to European courts to avoid that the Spanish Wealth Tax discriminates non residents.
This is not the first time that the Court of Justice of the European Union has condemned Spain to change its discriminatory legislation. We should remember, by way of example, that years ago non-residents paid 35% on capital gains from Spanish sources as opposed to the 15% paid by residents in Spain.
The fact that the joint limit to confiscation (set at 60% of part of the personal income tax base) cannot be applied by a Non-Resident represents a breach of the EU principle of equal treatment and triggers off a barrier to the free movement of capital that finds no justification for this differential treatment.
The joint limit establishes that the personal income tax and wealth tax payable (both together) cannot exceed the 60% of the personal income taxable base, so that, if they were higher, the Spanish Wealth Tax payable will be reduced til this limit is observed, without the reduction exceeding the 80% of the Spansih Wealth Tax payable.
This limit responds to a constitutional requirement established in Article 31.1 SC: taxes cannot be confiscatory: “(…) the prohibition of confiscation implies incorporating another logical requirement which obliges us not to exhaust the taxable wealth tax as a substratum, basis or requirement of all taxation under the pretext of the duty to contribute; (…) it is clear that the tax system would have this effect if, through the application of the various tax figures in force, the taxpayer were to be deprived of his income and property“.
Why is there no equivalent measure in Spanish law to avoid the fact that the Spanish Wealth Tax discriminates non residents?
Evidently, the non-existence of such a measure represents a full-fledged discrimination. NON-RESIDENTS pay Non-Resident Income Tax (on income from Spanish sources that may be generated by assets in Spain), Spanish Wealth Tax on assets held in Spain and, in addition, in their respective countries of residence, a tax equivalent to Personal Income Tax, corresponding to the income generated by these and/or other assets owned by them.
This is not the first time that the ECJ has condemned Spain to adapt its tax legislation to the Treaty of Rome in order to avoid unjustified asymmetries between residents and non-residents; due to its recent impact, we recall the Judgment of 3 September 2014, which allows non-residents who inherit assets in Spain to apply the regional legislation if it is more favourable than the state legislation.
We, therefore, consider that it is defensible to argue that the impossibility of applying a corrective measure of confiscation to non-residents in the Spanish Wealth Tax goes against the fundamental principles of European Union Law, and specifically against the principle of freedom of movement of capital (art. 63 TFEU).
It is unacceptable that this limit on confiscation can only be applied to taxpayers who are resident in Spain, creating a difference in treatment based solely and exclusively on residence in a Member State of the European Union or in a third country.
Let us take a simple example to see how the Spanish Wealth Tax discriminates non residents
A person resident for tax purposes in France has a property in Valencia inherited from his parents. Value declared for Gift Tax = €10M. This taxpayer lives in a small French village and is retired, receiving a pension of €25,000 per year.
He rents his house in Spain and receives an annual income net of expenses of €300,000. On this income he pays 19% Non-Resident Income Tax in Spain (i.e. €57,000) and in France a further €33,000, making a total of €90,000 per year in Personal Income Tax.
This gentleman pays a Spanish Wealth Tax of €200,000.
In other words, of the total net income generated by this property (€300,000), this gentleman pays €257,000 to the Spanish tax authorities, which represents 85.7% of the profitability produced by the property, 90% if we consider what he pays in France for the same property.
Doesn’t this seem confiscatory?
If this gentleman were resident of Spain, he would have the right to apply the 60% limitation rule so that the total amount of taxes payable will be limited to the 60% of his annual income.
What justifies this difference in treatment? Is it fair to say that the Spanish Wealth Tax discriminates non residents?
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