European Court of Justice’s lead council states Spanish Tax Form 720 fines are disproportionate

Raymundo Larraín Nesbitt, July, 21. 2021

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By Raymundo Larraín Nesbitt
Lawyer – abogado
16th of July 2021

Tax form 720, only mentioning it brings cold shivers to most taxpayers. It is single-handedly responsible for a mass exodus of thousands of expats since its inception and has acted as a firm deterrent of thousands more who refused to become tax residents in Spain to avoid it.

The disproportionate fines of this tax form had been challenged at Brussels and we were expecting a ruling on this matter last autumn, but I guess the emergence of the virus impacted on everything pushing it back.

The ECJ’s General Advocate, Mr. Henrik Saugmandsgaard, in a press release of yesterday concluded that Spain’s unfamous tax from 720 had implemented a system of disproportionate fines that go against the spirit of the Union.

Quoting the text: “M. Saugmandsgaard observe que ces amendes forfaitaires sont 15, 50 et 66 fois plus élevées que celles appliquées dans des situations internes.“ The fines are 15, 50, and 66 times higher than those applied in internal situations.

He continues: “Même  en  tenant  compte  de  la marge  d’appréciation dont  disposent  les États membres afin  d’établir  les  sanctions  appropriées, ces amendes  sont  tellement  élevées qu’elles paraissent disproportionnées, sans qu’il soit nécessaire de faire ici la distinction entre les différentes catégories de biens.“ Even if Member states have the power to modulate the appropriate fines, these fines are disproportionate without even needing to go into the different types of assets.

The gist of his report is that, as we had cared to point out repeatedly over the years, the fines levied by the Spanish Tax Office are completely disproportionate by rapport to other cases; they simply jump off the scale for no apparent reason.

He concludes: “L’avocat général propose donc à la Cour de déclarer que l’Espagne a manqué aux obligations qui lui incombent de garantir la liberté consacrée à l’article 63 TFUE (capitaux) ainsi que la liberté correspondante prévue  à  l’accord sur  l’EEE…“ The General Advocate proposes the ECJ to declare Spain in breach of the freedom of movement of capital enshrined in art. 63 of the TFEU. In other words, and in plain English, with this tax regulation Spain is breaching the core covenant of the foundational European treaty of Rome which sets out a series of freedoms as the guiding spirit of our Union.

What significance does his report hold?

None, all.

None, because it’s just a non-binding report. The report has only a purpose of guidance, but it is ultimately non-binding and not enforceable in any way.

All, because in 80% of the cases the ECJ follows the meticulous criteria laid out by its General Advocate. This is the first step of two required to overrule these lopsided penalties imposed by Spain.

The ECJ’s ruling

In a few months’ time (likely by the fall of ‘21) the ECJ will give it’s final ruling on tax form 720. In line with what we were long expecting, it will declare the overblown fines as null and void.

Conclusion

Kudos to our EU Overlords on this, they are right on track to rein in the Spanish Tax Office’s fiscal voracity.

Spain is the fifth country in the whole OECD (38 countries) with the highest fiscal pressure. Notable exceptions within Spain are the autonomous regions of Andalusia and Madrid (because of devolved competencies on tax matters).

If anything, Spain needs to urgently lower its taxes to become more competitive, attract foreign investments, and foster commercial activity on a large scale. Spain’s taxes are far too high as they stand right now. Also, I may add on a personal note, its bloated public sector needs to be trimmed down significantly to more manageable levels in line with fellow EU Member states.

 

L’art de l’imposition consiste à plumer l’oie pour obtenir le plus possible de plumes avec le moins possible de cris.” – Jean Baptiste Colbert.

French economist and Finance Minister under King Louis XIV.

Translated as: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

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Blog post first published on SPI: European Court of Justice’s lead council states Spanish Tax Form 720 fines are disproportionate