Spanish disclosure rules for foreign assets held contrary to EU Law

Spanish tax rules require residents to file an annual tax information report (Form 720) disclosing certain assets and rights held abroad, including any securities, any accounts in financial institutions, certain insurance policies or properties if their value is above EUR 50,000.

Non-compliance with these rules is subject to a harsh regime of penalties, including late submission of Form 720 or submission with inaccurate data, including fixed penalties based on each item of data unreported or misreported as well as penalties amounting to 150% of the value of undeclared assets.

In addition, the value of any undisclosed assets will be treated as an unjustified capital gain for personal/corporate tax purposes (so that it is taxable at the higher rates for ordinary income instead of the lower rates generally applicable to capital gains) unless the taxpayer is in a position to evidence that such foreign assets were acquired with declared income or at a time when the taxpayer was resident abroad. The law expressly states that time limits on claims under the statute of limitations shall not apply in relation to these penalties.

In November 2015, the European Commission opened infringement proceedings against Spain in relation to Form 720, which resulted in a referral to the ECJ in October 2019. That referral has been recently resolved by the ECJ in its ruling of 27 January 2022 in European Commission v Kingdom of Spain (Case C‑788/19). In its ruling, the ECJ has held that Spain has failed to comply with its obligations derived from the principle of free movement of capital.

In particular, the Court declared that the following aspects of the rules are contrary to the free movement of capital since they have the effect of deterring Spanish residents from transferring their assets abroad:

• non or late compliance with the reporting obligation involves taxation of the unreported assets without providing any possibility for the taxpayer to rely on the normal time limits under the statute of limitations;

• penalties of 150% of the amount of the unreported assets apply in addition to any fixed penalties; and

• the penalties are disproportionate compared with the penalties provided for in respect of similar infringements in a purely national context.

Whilst the ECJ considered that the regulations could, in principle, be justified in order to ensure the effectiveness of tax control and the prevention of tax evasion and avoidance, the ECJ held that the rules go beyond what is necessary to achieve those aims and are therefore disproportionate.

The fact that a resident has assets or rights abroad cannot result in a presumption of tax avoidance or evasion. Furthermore, rules that presume the existence of fraud on the basis of a failure to comply with the requirements set out in the law, without providing the taxpayer with the possibility of overturning such presumption, go beyond what is necessary.

With regard to the statute of limitations, the ECJ considered that, although it is permissible to extend the statute of limitations in certain cases, tax authorities cannot act without any time limits, especially in cases of mere non-compliance with a formal obligation.

Comment

The outcome of this case has been long awaited and the final judgment is broadly in line with expectations, given that the regime was widely regarded as far from compliant with the fundamental freedoms in the EU Treaty, and disproportionate in several aspects, particularly the lack of a statute of limitations.

The ECJ has not, however, declared the entire disclosure regime contrary to EU Law, only some aspects (ie the lack of a time limit and the penalties) which are expected to be modified in the near future by the Spanish government. Therefore, the reporting obligation remains in force and taxpayers will have to file Form 720 in respect of foreign assets held in 2021 by 31 March 2022.

The Spanish Ministry of Finance has recently pointed out that there are around 60,000 taxpayers who file this form annually and the total amount declared since its implementation is around EUR 225.2 bn. The Ministry has also pointed out that in the last three years practically no penalties have been imposed in relation to non-compliance with this reporting obligation pending the ECJ ruling. However, penalties amounting to some EUR 230m were imposed since 2013 until the recent suspension, and it is important that anyone who historically suffered any penalties under the regime should now consider whether they may be able to reclaim them from the Spanish state as a result of this judgment.