ECJ Welte Judgment: End of regional tax reductions in Spanish Inheritance Tax?

Pursuant to article 32 of Parliamentary Act no. 22 from 2009 on Regional Finance System, non-residents in Spain are not entitled to enjoy tax reductions set by the Spanish Regions on the Inheritance and Gift Tax. That is why the European Commission has referred Spain to the Court of Justice over discriminatory tax rules. Furthermore, the Supreme Court of Spain has raised a question before the Constitutional Court based upon similar grounds.

In this context, it is particularly worth having a look at the recent ECJ judgment on the Welte case (C-181/12 dated on 17 October 2013).

According to the judgment: “Articles 56 EC and 58 EC must be interpreted as precluding legislation of a Member State relating to the calculation of inheritance tax which provides that, in the event of inheritance of immovable property in that State, in a case where, as in the main proceedings, the deceased and the heir had a permanent residence in a third country, such as the Swiss Confederation, at the time of the death, the tax-free allowance is less than the allowance which would have been applied if at least one of them had been resident in that Member State at that time”.

The Court had already made a similar statement in the Mattner case (see Andrés García) but this new judgment goes further pointing out that “the taxable value of the inheritance of a non-resident heir, where he is partially subject to inheritance tax in Germany, is ‘in principle’, in the words used by those governments, less than that of a resident or non-resident heir who is wholly subject to that tax in that Member State” (paragraph 52).

“However -according to the Court- that fact cannot call into question the foregoing considerations since the amount of the tax-free allowance provided for in the legislation at issue in the main proceedings does not vary at all in relation to the amount of the taxable value of the inheritance but remains the same regardless of that latter amount. As is clear from the documents submitted to the Court, that allowance is automatically granted to each heir simply because they are subject to inheritance tax in Germany, so as to ensure that part of the estate is exempted through the reduction of the total amount of the inheritance. However, just as the status of a taxable person does not in any way depend on the place of residence – the legislation at issue subjecting any acquisition of an immovable property located in Germany to inheritance tax whether the deceased and heir be resident or non-resident – the aim of partial exemption of the estate affects all those subject to inheritance tax in Germany in the same way, whether they be resident or non-resident, since that exemption aims to reduce the total amount of the inheritance” (paragraph 53).

If we apply this doctrine to Spanish law, it might be considered incompatible with free movement of capital. The solution would be to extend regional tax reductions to non-residents or suppress them once and for all.

Many thanks to Professor Federico Garau (Conflictus Legum) and to Mr. Antonio Puentes for letting me know about the judgment. And thanks to Fernando Rivera for his help as translator.

Pedro M. Herrera

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