The differences between tax obligations for residents and non-residents

In February 2014 the European Union Court of Justice finally passed the law that puts an end to the unequal treatment regarding the tax on inheritances and gifts between residents and non-residents in Mallorca; an unequal assessment that sometimes led to a taxation exceeding 80%!

The differences presented before the European Court of Justice originate from the fact that in Spain each Autonomous Community is allowed to establish tax reductions, deductions and allowances considered appropriate, but these are only in place for the residents of the respective Autonomous Community. Non-residents, in contrast are taxed according to state standards, which are by far the highest in taxation.

Therefore, the assessment and final judgment passed by the European Court was clear as far as creating barriers against citizen’s freedom of movement and the circulation of capital within the European Territory is concerned, basic principles of the European Union, thus indicating that as per this following quote:

“The regulations of a member state that makes the application of a reduction of the taxable base of the inheritance or gift dependent on the place of residence of the predecessor and of the inheritor at the time of the death, or of the place of residence of the donor and of the recipient at the time of the gift, or also of the place in which a real estate property subject to inheritance or gift is located, when it gives rise to inheritances or gifts between non-residents, or concerning properties located in another member state, bear a greater tax burden than the inheritances or gifts in which only residents are involved or that only concerns properties located in the member state of imposition, constitutes a restriction of the free circulation of capital.”

In other words, in the European Union regulations that threaten the freedom of circulation canNOT be permitted. Spanish regulations with regards to the Tax on Inheritances and Gifts do not treat residents and non-residents equally and therefore, they must be modified.

Finally, the consequences of the September 3rd judgment are summed up as follows:

  • In order to comply with the European Union’s Court judgement, the Spanish government now has to give preference to the tax reform regarding the Tax on Inheritances and Gifts originally planned for 2016
  • This will then enable those European citizens affected by the alleged inequalities to request 1 the return of overpaid taxes, as long as the tax declaration was NOT submitted more than 4 years ago or 2 start procedures to claim damages against the Spanish state.

It will certainly prove to be a complex procedure, but the time really has come to take definite measures to equalize the treatment between the residents and non-residents in Mallorca, considering that the only difference between each group is whether or not they live 183 days per year in one country or another.

In features to follow, we will monitor the tax reform procedures for both Income and Corporate Taxes the government is currently working at; the reform should apply from January 2015. This reform will also lower the income tax of non-resident European citizens.

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