Recently, the High Court of Justice of Baleares has ruled on the different tax treatment received in the Wealth Tax by taxpayers who are Non-Residents in Spain.
To whom does Wealth Tax apply?
The Spanish Law distinguishes two types of taxpayers in the Wealth Tax:
- Taxpayers by “personal obligation”. These are individuals who reside for tax purposes in Spain. They are taxed on their worldwide assets, regardless of the place where they are held.
- Taxpayers by “real obligation”. These are individuals who do not have their tax residence in Spain. They are taxed exclusively on the assets and rights located or exercised in Spain.
The previous distinction is important because if the taxpayer is subject to personal obligation is allowed to apply certain reductions in the tax debt, among which is included the reduction called as “Income-Wealth limit”.
This reduction operates as a limit to the amount to be paid in the Wealth Tax by the taxpayer since it can determine a reduction of up to 80% in the Wealth Tax debt depending on the income subject to the Personal Income Tax obtained by the taxpayer.
The Spanish Law contemplates the possibility of applying this limitation on the Wealth Tax only for individuals taxed on personal obligation (tax residents in Spain). This means that according to the literal meaning of the Law, Non-Residents are taxed without applying this limit.
What new features have been introduced in Wealth Tax?
The High Court of Baleares has understood that this different tax treatment received by Non-resident is not in accordance with the European Law. The Court determines this treatment constitutes a situation comparable to the illegal treatment received by Non-residents in the Inheritance and Gift Tax. That difference of treatment was resolved with the famous 2014 CJEU Judgment declaring contrary to the European principle of free movement of capital the Inheritance and Gift laws that prevented Non-Residents from applying the reductions and deductions approved by the regions.
Applying the same legal grounds contained in this 2014 CJEU Judgment, the High Court of Baleares declares that there is identity between both taxes (Wealth Tax and Inheritance and Gift Tax), as both distinguish between two types of taxpayers (personal or real obligation). Consequently, the High Court of Baleares determines that the possibility of applying the “Income-Wealth limit” exclusively by taxpayers with a personal obligation constitutes a discriminatory measure that violates the free movement of capital.
It is foreseeable that the content of this Judgement will be subject to analysis by other Courts in Spain, although it constitutes a precedent insofar as it differs from previous rulings that the Spanish Courts had been upholding on this issue.
The legal grounds contained in this Judgement may constitute a reason for challenging the Wealth Tax paid by Non-Resident taxpayers in Spain, who have been prevented from applying this “Income-Wealth limit” in their tax returns.
At SLNYC we closely follow all the new developments in the legal-tax field that may affect our foreign clients in relation to their tax obligations in Spain.