European Commission won important Inheritance Tax Victory against Spain

While courting foreign property buyers to purchase holiday homes at the Costa del Sol and other parts of the Spanish mainland, the Spanish government has sought to introduce different rules for taxing foreigners, making a clear distinction between residents and non-residents, especially on the subject of inheritance tax and donations. Now the European Commission has won an important legal case against the Spanish government on the grounds of discrimination.

Owners of homes in Spain, who view their property purchase in Marbella or Fuengirola as a long-term investment and not just a place where they hang their straw hat and inflatable shark during their holidays, can breathe a sigh of relief. Should anything untoward happen to them and they should die, their heirs must now be treated exactly like Spanish residents with regard to inheritance tax and donations.

Addressing a definite Wrong in the Eurozone

The European Court of Justice decided on 3rd September 2014 that Spanish inheritance tax laws were contravening EU law. Treating residents and non-residents differently, when it comes to taxation on inheritance and donations, Spain had managed to overcharge a large number of people and was thus discriminating against non-residents.

Non-residents who have inherited assets in Spain or have been given assets in the form of donations in the past will now be entitled to apply for a refund and receive the amount by which they were overcharged back from the Spanish taxman.

French tax authorities will probably have turned green at the ruling, for foreign investors are avoiding investing further in the country in droves, angered by the huge tax burden placed on foreign investors by French tax authorities.

Spain's taxation on inheritance and donated assets are incompatible with the Treaty of the Functioning of the EU, the EU Commission stated in 2012 when making their case. The Treaty guarantees EU citizens free movement of their person and their capital. Spain's inheritance and donations taxation clearly contravenes the free movement of capital, the European Court of Justice's stated, but they do not contravene free movement of people.

People who are non-resident in Spain and have inherited or received donations and subsequently paid tax on such amounts during the last four years will now be able to demand refunds of the difference between the amount of tax the Spanish tax authorities asked for and the amount people should have paid had European law been adhered to.

For some people this will mean a considerable tax rebate. Even people who paid inflated taxation on inheritance and donations prior to the four year time frame may be able to claim refunds. It would certainly be worthwhile talking to a taxation expert about this matter, now that the European Court of Justice has made their decree on the discrimination on non-residents in Spain.

Taking the long-term View

Although the ruling will come as a blow to cash-strapped autonomous governments in Spain, who now have to find the money for the refunds, in the long run the European Commission's victory will pay off, as more people will be willing to buy holiday homes at the Spanish Costas.

If more non-residents are to make long-term investments in Spain, either through buying homes in Marbella, Nerja or Malaga or by investing in businesses at the Costa del Sol, Spain's taxation rules must treat such people fairly and the whole process of investing should become far more transparent than it is at present.

When Spanish house prices start to rise again, a holiday home in Marbella could increase in price by as much as 15% or more in the space of a few years. This makes such a property purchase an important long-term investment vehicle for retirement plans, but also a considerable asset to leave to one's family.

Anyone buying a property abroad is urged by their solicitor to make a will in that country to ensure that inheritance taxation won't come as a horrible shock to loved ones should the holiday home owner die unexpectedly. The new ruling should go a long way to clarify the matter and allow property investors to adjust their wills accordingly.