EU Pulls the Stops and Vows to Put and End to Inheritance Taxation Discrimination on Non-Resident Beneficiaries Inheriting in Spain

Raymundo LarraĆ­n Nesbitt, May, 20. 2010

Here we go again. As explained in my article on “Non-residents: Six Advantages of Making a Will in Spain” the matter of Inheritance taxation is a fairly complex and technical one compounded by the fact that the 17 autonomous regions of which Spain is made can rule on this matter besides the State.

Spurred by protests of non-residents inheriting in Spain (are you to blame Arthur?), Brussels has taken a closer look at this matter and has informed Spain that it gives it a 2 month’s deadline to set the record straight or else it will send the matter off to the European Court of Justice to rule on this issue. In any case don’t hold your breath, it will take some time to sort out.

In Spain there’s an ongoing trend to abolish Inheritance tax, especially in regions under the political control of the conservative party. This has created a three-tier system, speaking broadly, where you have on the one hand an increasing minority of regions which have gone as far as almost suppressing this tax whereas on the other hand you have a majority that apply generous tax allowances without actually suppressing it (i.e. Andalucía). Regional tax allowances are applied only to resident beneficiaries on one of the said regions.

On a third level you have the State regulation which has the least generous tax allowances and is applied to non-residents inheriting in Spain. Beneficiaries of an inheritance resident in one of these regions can take advantage of these generous regional tax allowances which in many cases almost suppress the Inheritance taxable base.

However non-resident beneficiaries inheriting in one of Spain’s regions may be faced with a hefty taxation bill (specially on large estates or when the named beneficiaries are non-family members) as it’s only the State law that is applied in their case in lieu of the more lenient regional laws. This amounts to a formal discrimination between residents and non-residents. These provisions are deemed to be incompatible with the free movement of workers and capital which the founding EEC Treaty of Rome enshrines. Brussels wants for non-resident beneficiaries to have application of State law waived and instead apply regional laws which are more tax-friendly. The problem will be deciding on the “connecting factor”. You can read in English the European Commission’s press release on following this link.

Following what’s happened in similar cases, we can safely assume that non-resident beneficiaries will be able to benefit in the future from the generous regional tax allowances that are now reserved exclusively to those holding resident status in one of Spain’s 17 different regions. Again, this new regulation will greatly reduce lawyer’s headaches. One just cannot stop himself from having warm feelings towards Brussel’s legislators that keep making our life’s easier.

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