In a landmark ruling on January 27, 2022, the Court of Justice of the European Union

condemned Spain, finding that the imprescriptibility of certain taxes and the disproportionate penalties imposed for failure to declare were contrary to European law. This article examines a decision with significant consequences for the taxpayers concerned.

European Commission Action against Spain and the Context of Form 720

On 23 October 2019, the Commission brought an action against the Kingdom of Spain, based on Article 258 of the TFEU, seeking to establish the incompatibility with EU law of certain aspects of the obligation imposed on Spanish residents to declare their assets and rights located abroad.

This obligation, which applies to all natural persons resident in Spain, as defined by tax regulations, concerns, in practice, in particular, many expatriates, often European nationals who have retained certain real estate or financial assets in their country of origin.

As a reminder, this reporting obligation stems from Law 58/2003, the General Tax Law (Ley General Tributaria), as amended by Law 7/2012. It was part of an effort to combat tax fraud by requiring Spanish tax residents to declare their assets held abroad.

Spain's Condemnation by the CJEU

On January 27, 2022, the Court of Justice of the European Union (CJEU) issued a ruling declaring Spain's tax liability contrary to EU principles, particularly due to the imprescriptible nature of the hypothetical tax debt in question and the system of penalties for failing to declare rights and assets located abroad.

The CJEU, however, ruled that the mere fact that a taxpayer resident in one Member State holds assets or rights outside the territory of another Member State cannot establish a general presumption of tax fraud and evasion (Lasteyrie du Saillant, C-9/02, EU:C:2004:138, March 11, 2004; K, C-322/11, EU:C:2013:716, November 7, 2013).

Indeed, it is clear from consistent case law of the European Court of Justice that measures imposed by a Member State which are likely to discourage, prevent or limit the opportunities of investors from that State to invest in other States constitute a restriction on the free movement of capital guaranteed by Article 63 of the Treaty on the Functioning of the European Union or TFEU (Commission v Belgium, C-478/98, EU:C:2000:497, 26 September 2000; Commission v Germany, C-112/05, EU:C:2007:623, 23 October 2007; NN (L) International, C-48/15, EU:C:2016:356, 26 May 2016).

Imprescriptibility and Disproportionate Sanctions

In particular, the fact that the value of undeclared assets and rights becomes taxable as if it constituted income in all cases, without prior assessment of whether the event giving rise to the existence of these assets and rights could generate non-time-barred taxation in Spain, was deemed discriminatory. The European Court reiterated that the statute of limitations must always be respected when it is advantageous to the taxpayer.

Furthermore, the fact that Spain has imposed an extremely repressive system of sanctions for imperfect or late compliance, often due to ignorance, with the obligation to disclose assets and rights held abroad. In particular, the application of a proportional fine of 150% of the theoretical tax amount – as calculated on the sums corresponding to the value of these assets or rights – which can be combined with fixed fines, was deemed by the European Court to be a disproportionate infringement on the free movement of capital.

However, it is important to note that this decision does not cancel the obligation to declare assets and rights located abroad using "form 720".

What are the consequences for taxpayers?

It has nevertheless been asserted that the imprescriptibility of the tax liability, as well as the system of penalties attached to non-compliance with this obligation, creates a difference in treatment between Spanish residents, depending on the location of their assets, and therefore constitutes a disproportionate infringement that is contrary to the principle of free movement of capital as defined in Article 63 of the Treaty on the Functioning of the European Union (TFEU) and Article 40 of the Agreement on the European Economic Area (EEA).

This landmark ruling, which reaffirms the primacy of fundamental principles of European law in tax matters, will undoubtedly have significant implications, especially since it is directly applicable in Spain.

In practice, this means that the provisions deemed illegal are annulled. Taxpayers who have unduly paid disproportionate penalties will therefore be able to claim a refund.

In any case, the Spanish government will have to propose to the Spanish parliament in the coming weeks a text aimed at amending Spanish law in order to make it compatible with European law regarding the applicable sanctions regime.

The Primacy of European Law Over Spanish Domestic Law

Moreover, and by way of comparison, it is interesting to note that the Spanish Constitutional Court's decision, which ruled that the method for calculating municipal capital gains tax in Spain was unconstitutional, did not have retroactive effect (see our previous article). Taxpayers, unlike in the present case, cannot therefore claim a refund of municipal capital gains taxes unduly paid, which may seem unfair (in light of the direct application of European law) and even anachronistic in a state governed by the rule of law at the beginning of the 21st century.

Our French law firm in Spain is at your disposal for further information.

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