Developments and Outlook

Following the decision rendered by the Court of Justice of the European Union on January 27, 2022, the Spanish government adopted Law 5/2022 of March 9, 2022 (entered into force on March 11, 2022) to bring Spanish regulations into compliance with European law.

The highest European court had declared the imprescriptible nature of a tax debt of a purely hypothetical nature to be contrary to the principles of the European Union. It had also deemed the system of penalties accompanying the failure to declare rights and assets located abroad excessive.

The new Spanish law (for the purposes of this compliance) amends both the Corporate Tax Law and the Non-Resident Income Tax Law.

Adaptation of Spanish Law through the Adoption of Law 5/2022

It should be noted that the preamble to the new Spanish Law 5/2022 reiterates that the very purpose of this text is to bring Spanish law into line with European law, following the decision rendered by the Court of Justice of the European Union on January 27, 2022.

To this end, the new law amends certain provisions and provides, in particular:

  • The elimination of the 150% penalty – based on a mere presumption of realization of a capital gain or undeclared income – when it appears that an asset or right held abroad by the taxpayer has not been declared to the Spanish tax authorities by filing form "Modelo 720".
  • The elimination of the presumption, clearly abusive, of the existence of income equal to the value of the undeclared asset or right upon the discovery by the Spanish tax authorities of any asset held abroad.
  • The elimination of offenses and the special penalty regime for failure to declare assets and rights located abroad. The new penalty regime for the actual and proven concealment of income or assets is now the standard regime contained in the General Tax Law. Fines for failure to file form "Modelo 720" now range from €150 to €250 per category of asset or right.
  • The elimination of the imprescriptibility of the obligation to file form "Modelo 720" for both individuals and legal entities.

The presumption of illegality regarding the origin of undeclared assets is also eliminated. Taxpayers will be able to demonstrate that undeclared assets were legally acquired.

However, it should be noted that the obligation to file Form 720 to declare assets and rights located abroad remains fully in effect.

Supreme Court Decisions Following Law 5/2022

Following the decision of the Court of Justice of the European Union and the adoption of this new legislation, the Spanish Supreme Court also recognized and declared that the previous system of penalties for failure to file Form 720 violated Spain's obligations under the Treaty on European Union.

The Supreme Court issued its first significant ruling on this matter on June 20, 2022 (Second Section of the Administrative Litigation Chamber). The highest Spanish court declared that "the obligation to pay income tax cannot be subject to any statute of limitations." In this particular case, the Supreme Court therefore ruled that the tax claim was time-barred and overturned the lower court's judgment.

Further groundbreaking rulings by the Supreme Court were subsequently issued, notably on July 4, 2022 (appeal no. 6410/2019) and July 6, 2022 (appeal no. 6202/2019). In these cases, the Supreme Court clarified that taxpayers' rights stemmed from the application of provisions of European Union law itself, which have direct effect within the Spanish domestic legal system.

This analysis allows for the retroactive application of the sanctions, including for tax adjustments incurred before the European Court of Justice's ruling of January 27, 2022.

Many taxpayers are now seeking reimbursement of these substantial penalties, which were wrongfully imposed in the past. According to some estimates, the amount of these reimbursements could reach nearly €230 million.

Our Franco-Spanish law firm is available to provide further information.

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