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SPANISH REPORTING OF OVERSEAS ASSETS by Rafael Villena Badia and Jose Daniel Lopez Aquilar (Spain)

The European Court of Justice ruled contrary to the TFEU the Spanish penalty scheme on the reporting obligation upon overseas assets.

The European Court of Justice has ruled illegal certain aspects of the controversial reporting obligation on overseas assets set out in the Spanish Tax Code, commonly known as “Form 720”.

By means of form 720, in force since 2013, Spanish tax residents must disclose their overseas assets as of 31stDecember each year to the tax authority. In particular, the following must be disclosed:

  • Securities representing equity or debt which are deposited in a foreign entity and,
  • Real estate or the rights in rem on real estate located abroad.

The reporting obligation rests with both, the titleholder of the assets and the Ultimate Beneficial Owner of the assets. In the case of bank accounts, authorized signers are also liable to report.

It is important to point out that the reporting obligation itself has not been struck down and, therefore, taxpayers holding overseas assets must continue filing form 720 as in previous years.

What has been struck down by the court is the penalty system around the reporting obligation that can be broken-down into three different consequences:

  1. Form 720 has its own penalty scheme, which results in very serious fine of €5000 per disclosure which is missing or incorrectly reported.
  2. In addition to the fines above, the Spanish legislator modified article 39 in the Personal Income Tax Act to reinforce the adverse consequences arising from failing to report or reporting incorrectly the overseas assets.

 

In practice, the new paragraph results in eliminating the statute of limitation period for unreported assets.

 

  1. Finally, the legislator included a new tax offence in the General Tax Code that imposes a fine of 150% on the tax due resulting from the unjustified capital gains triggered when being uncompliant with Form 720.

As an example, failing to report a bank account in a bank abroad with €1M balance would have resulted, before the judgement, in a tax due of €481k plus €747k penalty (in total €1.228 million).

The judgement issued by the European Court of Justice, has ruled illegal the penalty system above because it is deemed contrary to the free movement of capital.

For the sake of accuracy, what has been ruled illegal to the free movement of capital by the European Court of Justice is the following:

  • The capacity of the Spanish tax authority to charge taxes on income earned in barred tax years that results from article 39 of the Spanish Personal Income Tax Act and 121 of the Corporate Income Tax Act when failing to report overseas assets in form 720.
  • The fine of 150% on the tax due resulting from the unjustified capital gains triggered when being uncompliant with Form 720.
  • The penalty scheme that specifically applies to the Form 720.

The immediate consequence of the judgement of the European Court of Justice is that the regulation supporting the penalty system around the form 720 shall be considered null and void having the following consequences:

  • Taxpayers, who already paid the penalties and tax due resulting from the punishment system around the form 720, are now entitled to claim the refund of the amounts paid.
  • To this date and until the new penalty system is approved by the Spanish government, the disclosure of concealed assets abroad has no penalty scheme. Therefore, uncompliant taxpayers now have the opportunity to legalize their situation at a very low cost.

In SELIER ABOGADOS, we are at your disposal for any additional question you may have regarding the consequences of the judgement to your specific case. Our international tax team is ready to assist you in claiming the refund of the unduly paid penalties and taxes arisen from the illegal provisions according to the EU Court of Justice, as well as to provide advice on the cost of the disclosure of any concealed asset under this unprecedented situation.

 

Contact person:

Rafael Villena Badía

Tax Partner

rafael.villena@selierabogados.com

+34 677 617 552

www.selierabogados.com

José Daniel Lopez Aguilar

Senior Manager

daniel.lopez@selierabogados.com

+34 677 617 560

www.selierabogados.com