The Directorate General of Taxes (DGT) has issued several resolutions in recent times in relation to donations and inheritance transactions involving assets located in Spain, but whose beneficiaries are not tax residents in our country.
It is out of legal controversy which regional regulations are applicable in cases of donations or inheritances between Spanish tax residents with respect to assets located in our country. However, when the operation has an international aspect, taxation is more complex, and the key question arises: What taxes are involved in this operation? Can I apply regional regulations and their allowances? The General Directorate of Taxes (hereinafter, DGT) has recently issued its opinion on this matter.
As we have commented on previous occasions, in Spain the Inheritance and Gift Tax regulations are state regulations, although, as this tax is collected and managed by the Autonomous Communities, the Autonomous Communities have passed laws regulating bonuses and reductions that are more extensive and beneficial than the state regulations.
In order to know which autonomous regulations apply in each case, we must refer to the connection points that determine that:
- The regional legislation of the territory where the testator had his habitual residence on the date of accrual is applied.
- In the case of a donation of real estate, the regulations of the Autonomous Community where the real estate is located apply.
- In the case of a donation of any other type of asset or right, the regulations of the autonomous community where the donee (the person receiving the donation) had his/her habitual residence at the date of the donation apply.
However, as we have already indicated in previous articles, the Judgment of 3rd September 2014 (Case C-127/12), of the High Court of Justice of the European Union, ruled that the Spanish regulations were contrary to the principle of free movement of capital provided for in Article 63 of the Treaty on the Functioning of the European Union for providing different treatment to EU residents.
Motivated by this ruling, the Second Additional Provision (DA 2ª) of the Inheritance and Gift Tax Law was approved, which established which would be the connection points when one of the taxpayers involved was resident in a Member State of the European Union.
Subsequently, the Spanish Supreme Court, in various rulings, including number 242/2018, of 19th February 2018, ruled that the Second Additional Provision should also be applicable to non-EU taxpayers who are non-residents.
When the transaction has an international relationship between the deceased and the heirs, the points of connection with a determined Autonomous Community vary. Specifically, it was indicated that such points of connection would be as follows:
- In the case of an inheritance from a non-resident person, the regulations approved by the Autonomous Community where the highest value of the assets and rights of the estate located in Spain are located.
- And, if the deceased did not have any property in Spain, but the heirs and legatees reside in Spain and are subject to the payment of the tax due to personal obligation, the regulations of the Autonomous Community where these beneficiaries reside can be applied.
- In the case of an inheritance from a person who is a resident but whose heirs or legatees are not resident, the autonomous regulations of the Community where the deceased resided will apply.
- In the case of a donation of real estate, the taxpayer would be entitled to choose to apply the regulations of the Autonomous Community where the real estate is located.
- In the case of a donation of any other type of asset or right, it would be entitled to opt to apply the regional regulations approved by the Community where the asset had remained for the highest number of days in the period of the five immediately preceding years, counted from date to date, ending on the day prior to the date on which the tax accrued.
And, in line with this criterion, the DGT has recently issued several resolutions recognizing the application of this DA 2ª, and therefore of the regulations of the Autonomous Communities, among which the following should be highlighted:
- Binding Consultation V0282-20, dated 7th February, in relation to the donation of 50% of two properties located in Marbella (Malaga) between spouses, both of Lebanese nationality and residence.
With respect to the possibility of applying the Andalusian regional regulations that establish a 99% allowance for donations between spouses (Group II of the Tax Law), the DGT concludes that although it is not competent for the interpretation of the provisions issued by the Autonomous Communities, it does confirm that the second additional provision is applicable in relation to “all non-residents, regardless of whether they reside in a Member State of the European Union or the European Economic Area or in a third country”.
- Binding Consultation V1256-19 of 3rd June, regarding an inheritance of an Argentine national and resident of various investment funds and current accounts held in a bank located in Madrid, all in favor of, among others, persons resident in Argentina. Likewise, in this case, the possibility of applying the autonomous regulations of the Community of Madrid was also considered.
The DGT expressly resolves that the beneficiary taxpayers will be entitled to apply the specific regulations approved by the Autonomous Community where the highest value of the assets and rights of the estate located in Spain, in this case Madrid, is located.
- Binding consultation V1517-19, dated 24th June, on an inheritance of real estate and bank accounts distributed between Galicia and Valencia, but where the deceased resided in Switzerland. The DGT concludes that the taxpayers can apply the regulations of the Autonomous Community where the highest value of the assets and rights of the estate located in Spain is located.
- Binding consultation V3193-18, of 14th December, in relation to the inheritance of a person resident in Russia who owned shares in Spanish entities and which are inherited by his descendants resident for tax purposes in Madrid.
The DGT concludes that the beneficiary heirs can apply the regional regulations of the Community of Madrid as it is the place of residence of the heirs, even though the deceased did not reside in Spain.
- Binding consultation V3151-18, of 11th December, on the inheritance received by a tax resident in Cataluña of assets owned by a person resident in Andorra, which resolves in the same sense as V3193-18 by allowing the application in this case of the autonomous regulations of Cataluña, as it constituted the Community of tax residence of the beneficiary.
Payment of Inheritance and Donation Taxes
It is important to remember that, without prejudice to the possibility of opting to apply the regulations of a specific Autonomous Community, when the donor or donee does not reside in any Autonomous Community of Spain and there is no point of connection with any of them, the competent entity for levying the tax is the Central State Administration, i.e. the State Tax Administration Agency, specifically, the National Tax Management Office.
And we must not forget that while for a resident taxpayer the regional regulations are automatically applicable, for a non-resident taxpayer, the application of the regional regulations is an option that must be exercised when submitting the tax liquidation.
For this reason, it will be necessary to use form 650 regulated by the State Agency of Tax Administration and, in it, indicate which regional regulations are to be applied.
Capital gain/loss in income and other taxes.
Without prejudice to the corresponding taxation by Inheritance and Gift Tax, it is necessary to remember that the transfer of an asset is in turn subject to Personal Income Tax or Non-Resident Tax, unless it derives from a transfer mortis causa (inheritance) which is exempt from taxation under Article 33.b) of the Personal Income Tax Law.
Therefore, in the case of a donation of any asset other than cash, there is a capital gain or loss which must be reflected in the income tax return and which will be determined as the difference between the acquisition value and the transfer value of the item.
In this case, the transfer value, being lucrative, will coincide with the value given to the element in question in the declaration of the Inheritance and Gift Tax filed, and cannot exceed the market value.
And, likewise, if a real estate property is transferred for lucrative purposes, the tax on the increase in value of urban land, more commonly known as municipal capital gains tax, is accrued.