Revocation of penalties for Form 720

Judgment in Case C-788/19:

Tax information obligation in Spain

On 27 January 2022, the Court of Justice of the European Union handed down the long-awaited ruling on the penalties imposed by Spain for incorrectly or erroneously declaring the famous Model 720.

Once the ruling was published, some doubts arose as to whether or not the Model 720 was annulled or not, in terms of the obligation to declare assets and rights located abroad.

Well, we comment below on what exactly the Judgment on case C-788/19 means:

On 15 February 2017, the European Commission issued a reasoned opinion, in which it declared certain aspects of the obligation of tax residents in Spain to declare their assets or rights located abroad through form 720 to be incompatible with European Union law. In particular, the consequence of receiving a financial penalty for failure to file such a declaration, in terms of the disproportionate nature of such penalties in relation to the objectives in question.

What the Court of Justice has ruled is that Spain has failed to fulfil its obligations as a country under the principle of the free movement of capital.

Spain justified the introduction of Model 720 at the time by the need to obtain information from its tax residents on the assets and rights they hold outside Spain, since it found it much more difficult to obtain this information compared to what they hold within Spain, and argued that the information exchanged with other EU Member States was not sufficient, or that it was globally insufficient. However, the Court’s examination reveals that this legislation goes beyond what is necessary to achieve these objectives, based on three aspects:

1. It considers that Spain has failed to fulfil its obligations to respect the free movement of capital. This is because it provides that failure to comply or imperfect or untimely compliance with the reporting obligation results in the taxation of undeclared income corresponding to the value of those assets as “unjustified capital gains”, without the possibility, in practice, of protection under the statute of limitations.

In other words, the reality is that it made the penalties for these declarations imprescriptible, which is beyond all logic and legal reasoning. Therefore, the Court points out that the regulation produces a non-applicability of the statute of limitations and, in addition, allows a consummated statute of limitations to be challenged in favour of the taxpayer, which violates the fundamental requirement of legal certainty. The Spanish legislator has therefore gone beyond what was necessary to ensure the effectiveness of tax controls and to combat tax fraud and evasion, which was the ultimate purpose of obtaining all this information.

2. According to the CJEU, Spain is also failing to comply with its obligations under the free movement of capital by imposing a fine of 150% of the tax calculated on the amounts corresponding to the value of the assets or rights held abroad for non-compliance or imperfect or late compliance, this fine can be cumulated with other fines of a fixed amount that are applied to each omitted, incomplete, inaccurate or false piece of information or set of information, which makes this sanction extremely repressive, leading to penalties that can exceed the amounts of the assets or rights located abroad, constituting a disproportionate impairment of the free movement of capital.

3. Finally, the free movement of capital is also infringed by penalising non-compliance or imperfect or late compliance with the obligation to provide information on assets and rights located abroad with fixed fines, the amount of which is out of all proportion to the penalties provided for similar offences in a purely national context and the total amount of which is not limited. The amount of these fines is 5,000 euros for each omitted, incomplete, inaccurate or false item of information or set of information, with a minimum of 10,000 euros, and 100 euros for each item of information or set of information declared after the deadline or not declared by electronic, computer or telematic means when there was an obligation to do so, with a minimum of 1,500 euros.

So what are the consequences?

The consequences are that the Ruling prohibits Spain from applying the entire specific sanctioning regime that was developed around form 720, but not from requesting this information, so that the obligation to declare this form continues to exist.

At the same time, it prohibits the application of the non-applicability of the statute of limitations on income under article 39.2 of the Personal Income Tax Law, i.e. unjustified capital gains that should be included in the general tax base of the oldest tax period among those not subject to the statute of limitations that can be regularised.

What penalty regime will apply if the specific one has been cancelled?

Well, since a specific sanctioning regime has been annulled, and a general sanctioning regime exists, the tax law requires the application of this general regime insofar as there is no other specific regime in force and valid. This general regime in Spain involves applying Law 58/2003, of 17 December, General Tax Law, and specifically the articles of Title IV, “the power to impose penalties”, which are from 178 onwards, as well as Articles 27 and 28 on surcharges for late filing and in the executive period. However, even the application of the general penalty regime could be debatable because Form 720 itself has its own specific regulations and this has been annulled.

Can penalties be reclaimed?

Finally, the door is obviously open to, on the one hand, declaring all open challenges to these penalties null and void and, on the other hand, to initiating new procedures to request a refund of undue income in order to return the penalties paid by those taxpayers who had to pay in application of the specific penalty regime of model 720 that has now been annulled, although the route could be a claim for the State’s (Spain’s) financial liability, for having approved a rule contrary to Community law. Another possible way of challenge could be to initiate a special procedure for the review of acts that are null and void under Article 217 of the LGT for those that are prescribed by the statute of limitations.

Let us hope that the CJEU itself makes clarifications in this regard and that the Spanish legislator makes the relevant changes, as well as ex officio refunds, which would be the right thing to do.