INHERITANCES OF NON-RESIDENTS. GUIDE TO NOT MISS (TOO MUCH)

In recent years there has been a significant increase in lucrative transfers involving elements, personal or real, partly located in Spain and partly in other countries or, what is even more common, located in different autonomous communities.

The problem consists in determining which tax legislation is applicable to each case and before which public administration the corresponding inheritance or gift tax must be declared and settled, if applicable.

The question is not trivial since there are important differences in the calculation of tax contributions if we take one or another tax regulation.

In another entry of this blog and that you can consult here, we made a very general approach, of the taxation of non-residents in the inheritance and donations tax, with special reference to the facts that had influenced the final solution that Spanish legislation has.

In this post, we are going to make a much more practical view, apologizing in advance for the length, although the different titles may help to go directly to aspects that may interest us.

IN WHICH COUNTRY IS IT TAXED?

CONNECTION POINTS OR CRITERIA

The criteria used by Spanish international tax law are the most common and in accordance with the current custom of developed countries in this matter:

• personal judgment habitual residence (against the most archaic criterion of nationality)
• real criterion of the place where the goods are located or the obligations are fulfilled

SPANISH REGULATORY SCHEME

The basic Spanish norm is the Inheritance and Donation Tax Law (Law 29/1987 of December 18), which configures the tax according to a classic scheme:

HI (taxable event: Act or business that gives rise to the tax levy)

SP (passive subject: person who must bear the burden of the tax)

BI (tax base: quantification of the taxable event)

BL (taxable base: tax base less reductions (R))

CI (full quota: results from applying the tax rate (T) to the BI, multiplied by a coefficient based on the degree of kinship)

CL (liquid fee: full fee minus deductions (D) and allowances (B))

THE TAXABLE EVENT

• It is the acquisition by Physical persons of one or more assets or rights for profit, whether intervivos or mortis causa, as well as the perception of amounts of life insurance provided that the policyholder and beneficiary are different persons.
• Priority is given to what is established in international agreements and in the economic agreements with the Basque Country and Navarre.

PASSIVE SUBJECT

• In “mortis causa” acquisitions, the assignee
• In donations, the donee
• In life insurance, the beneficiary

The law distinguishes between:

• Taxpayer due to personal obligation, who is the one who has his habitual residence in Spain, and who has to pay taxes for all the world heritage that he receives in the transmission (personal connection criterion)
• Taxpayer by real obligation, which is the non-resident in Spain who receives assets and/or rights located, which can be exercised or must be fulfilled in Spain, as well as the non-resident beneficiary of life insurance contracted with a Spanish or foreign insurer that act in Spain (real connection criteria)

HABITUAL RESIDENCE (TO DETERMINE IF IT IS TAXED IN SPAIN OR ABROAD)

• Personal income tax rules are applied, with the interpretation of the ISD regulation, so that, in principle (and except in very special cases) a person who has stayed in Spain for more than 183 years is considered a resident in Spain, taking into account the last 365 days.

REDUCTIONS, RATE. MULTIPLIER COEFFICIENT The state law establishes a series of base reductions, distinguishing mortis causa acquisitions, donations and life insurance, a single rate (progressive by sections) and multiplier coefficients based on the pre-existing assets of the acquirer and their relationship with the transferor or originator (group)

FEE DEDUCTIONS

• The DEDUCTION FOR INTERNATIONAL DOUBLE TAXATION stands out, which allows taxpayers due to personal obligation (that is, exclusively residents) to deduct from the fee what was actually paid abroad for a similar tax.
• In addition, the law provides that, in addition to the state deductions, additionally, the deductions and rebates established by the Autonomous Communities may be applied in the appropriate cases.

ASSIGNMENT OF THE TAX TO THE AUTONOMOUS COMMUNITIES

By Law 22/2009 of December 18 on the Financing System of the Autonomous Communities, the State assigns to the Autonomous Communities the yield of the tax whose taxable event is understood to be carried out in their territory, while granting them powers to legislate regarding the following aspects of the tax:

• reductions
• tax rate
• Multiplier coefficients
• Deductions and allowances

The same Law establishes that the resident in Spain is in an autonomous community, which is the one in which said resident has remained for the longest time in the last five years, counted from date to date, from the moment of accrual of the tax backwards.

IN WHICH AUTONOMOUS COMMUNITY IS TAXED?

But which residence is relevant? In which Community must the tax be settled in accordance with its own regulations?

The answer is multiple:

1. In successions "mortis causa" (including life insurance), the territory (Community) of the habitual residence of the deceased.
2. In donations of real estate, the Community in which they are located.
3. In donations of other assets and rights, the Community of residence of the taxpayer.
4. There are weighting and distribution rules when the income must be attributed to more than one Autonomous Community

IMPORTANT: These connection criteria are only applicable (or rather were only applicable) to taxpayers due to personal obligation (residents in Spain). Until relatively recently, this system excluded both non-resident taxpayers (real obligation) and cases in which, even in the case of a personal obligation to contribute, the point of connection cannot be established, such as the case in which the deceased did not were resident in Spain (and, therefore, not in any Autonomous Community). In these cases, the State regulations are applied (applied) and the tax is settled (settled) before the AEAT.

It should be noted that regional regulations can only improve tax conditions and characteristics, so that differences (sometimes abysmal) in taxation may occur if one or another regional regulation is applied and, in any case, comparative damage to taxpayers that must liquidate the tax subject to the regulations of the State.

THE REGULATIONS OF THE AUTONOMOUS COMMUNITIES ALSO APPLY TO RESIDENTS ABROAD AND TO PROPERTY ABROAD, IN CERTAIN CASES.

The Court of Justice of the European Union in Judgment of September 3, 2014 declared that Spain had breached the obligations assumed in article 66 of the Treaty on the Functioning of the European Union (TFEU) and in article 40 of the Agreement on the European Economic Area (EEEA) for allowing differences in the tax treatment of residents and non-residents in Inheritance and gift tax. This Judgment has effects "ex tunc" (always) which allows the claim of retroactive improper proceeds (except the prescription, I understand).

In order to adapt Spanish legislation to said judgment, the Final Provision 3 of Law 26/2014, of November 27, introduced in the Inheritance and Donations Tax Law a Second Additional Provision, which establishes new points of connection when the country with which the conflict occurs is one belonging to the so-called European Economic Area (EEA) which is made up of the countries of the European Union and three other countries: Iceland, Norway and Liechenstein (in From now on, references to the EEA will be understood to be made to the exclusion of Spain), although some understand that the Judgment would also affect third countries, by application of the second paragraph of art. 66 of the TFUE and that the legal modification should also apply to them, Therefore, they advocate requesting the return of undue income, proposing the resources that, if applicable, proceed.

Neither does the new regulation address (nor have the Autonomous Communities) some traces of discrimination that remain for residents in Spain, such as some regional bonuses that are established only for residents of the community, which are based on clearly unconstitutional provisions (for For example, in Aragon, where a certain bonus in Donations is linked to the fact that the donor and recipient have their habitual residence in their territory, or in the Valencian Community, where a bonus of 99% of the fee was established only for residents of that community who have been declared unconstitutional by Constitutional Court Judgment 60/2015 of May 18).

The 2nd DA of the Law establishes the following criteria:

1. In successions mortis causa, with the deceased residing in the EEA, the regulations of the Autonomous Community where the highest value of the goods located in Spain is found are applied. If there is no property in Spain, in the Autonomous Community in which the taxpayer resides.
2. In mortis causa successions, with the deceased residing in a Spanish Autonomous Community and taxable person residing in the EEA, the regulations of said Autonomous Community apply.
3. In Donation of real estate located in Spain in favor of residents in the EEA, the regulations of the Autonomous Community in which they are located apply.
4. In donation of real estate located in the EEA in favor of residents in Spain, the regulations of the Autonomous Community in which the taxpayer resides apply.
5. In the donation of movable property in favor of residents in the EEA, the regulations of the Autonomous Community in which the property has remained the longest during the last five years are applied, counted from date to date until the day before the accrual of the tax.

• In addition, the 2nd DA establishes the same criterion of residence in an autonomous community as the Tax Assignment Law, that is, the place of longest residence in the last five years.
• It also establishes rules for the simultaneous application of two or more regional regulations in the event that the same purchasing act leads to it.
• Lastly, it establishes rules for filing self-assessments with the AEAT, from which an important conclusion can be drawn: In the cases regulated in DA 2, the rules of the Autonomous Communities are applied, but the yield continues to be in favor of the State, and must be self-assessed at the AEAT.

 SUMMARY TABLES

After ruling out the application of an International Treaty or any of the economic Agreements with the territories of the Basque Country or the Foral Community of Navarra, we can summarize schematically the presentation of the regulations that are applicable depending on the case.

Abbreviations:

R-ESP: Resident in Spain

R-EEA: Resident in the European Union or another country of the European Economic Area, except Spain

NR: Non-resident in EEA country

> : Major

 THE SHADED BOXES INDICATE WHICH REGULATION SHOULD BE APPLIED

SUCCESSION DEATH CAUSE	CAUSE
SUBJECT     PASSIVE	HOME	R-ESP	R-EEE	NR
	R-ESP	CA RESIDED THE CAUSER	CA > ESP VALUE or RESID. SP ^^	STATUS^^
	R-EEE *	CA RESIDED THE CAUSER	AC > ESP VALUE	STATE
	NR*	STATE	AC > ESP VALUE	STATE
	The underlining indicates that even if the regulations of a CA are applied, the settlement must be made at the AEAT
	* indicates that they are SP by real obligation: they only pay taxes for assets and rights in Spain
	^^ indicates that the SP can apply the deduction for double taxation if it has paid taxes abroad for the same assets
PROPERTY DONATION		PLACE OF SITUATION OF THE PROPERTIES
SUBJECT PASSIVE (DONEEE)	HOME	SPAIN	EEA	OTHERS
	R-ESP	WHERE ARE THEY FOUND?	CA RESIDENCE SP^^	STATUS^^
	R-EEE	WHERE ARE THEY FOUND?	DOES NOT TAX IN SPAIN	DOES NOT TAX IN SPAIN
	NR	STATE	DOES NOT TAX IN SPAIN	DOES NOT TAX IN SPAIN
	The underlining indicates that even if the regulations of a CA are applied, the settlement must be made at the AEAT
	^^ indicates that the SP can apply the deduction for double taxation if it has paid taxes abroad for the same assets

 

FURNITURE DONATION	DONOR
SUBJECT PASSIVE (DONEEE)	HOME	R-ESP	R-EEE	NR
	R-ESP	CA RESIDENCE SP	CA RESIDENCE SP ^^	CA RESIDENCE SP ^^
	R-EEE*	CA > TIME IN LAST 5 YEARS	CA > TIME IN LAST 5 YEARS	CA > TIME IN LAST 5 YEARS
	NR*	STATE	STATE	STATE
	*: Only if they receive assets and/or situated rights, which can be exercised or must be fulfilled in Spain, or Spanish insurance (they only pay taxes for these concepts)
	^^ indicates that the SP can apply the deduction for double taxation if it has paid taxes abroad for the same assets.
	The underlining indicates that even if the regulations of a CA are applied, the settlement must be made at the AEAT

APPENDIX 1

INTERNATIONAL CONVENTIONS AND TREATIES

The Inheritance and Donations Tax Law puts before its own application that of international conventions and treaties that have become part of the Spanish legal system.

Despite the fact that Spain has signed agreements to avoid double taxation with more than 90 countries and territories, only 2 refer to inheritance tax:

• Agreement with France to avoid double taxation regarding inheritance taxes, published in the BOE on January 7, 1964.
• Agreement with Sweden to avoid double taxation regarding inheritance taxes, published in the BOE on January 16, 1964.

Despite being contemporary, these agreements are not identical, although we can extract some common principles and criteria:

• They apply to inheritances caused by persons residing in one of the two contracting states.

• Its purpose is to avoid double taxation when the tax is levied in the two contracting countries.

 

• They do not apply to donations or other intervivos transmissions (except for family allowances in the agreement with France, which also applies to donations).
• They have a vocation of permanence, providing for the substitution of the taxes then in force (in Spain, the Relict Estate Tax and the Inheritance Tax that is levied on hereditary quotas) by others that are levied on the same taxable event. Today they are included in the Inheritance and Gift Tax
• They distinguish for the application of the norm of one state or another between immovable property and different categories of movable, tangible and intangible property.
• They establish as the first point of connection for tangible assets, especially for real estate, the place (contracting country) where they are located.
• They establish rules to determine residence when both national laws attribute it to the country itself.
• They establish a principle of non-discrimination, so that residents of one country who must pay taxes in the other have the same advantages as residents of the latter.
• They must be settled in the state to which the applicable regulations correspond.

After the publication of this entry, the TS judgment of February 19, 2018, declares the judgment of the  Court of Justice of the European Union in Judgment of September 3, 2014. For more information, see here

 THE AGREEMENT WITH FRANCE

DETERMINATION OF THE CONNECTION POINTS OR CRITERIA

• Movable property and its accessories, the place where they are located (as long as it is Spain or France, it is understood).
• Livestock and farming implements continue to the place where the farm to which they are attached is located.
• The furniture integrated in a company, in the place where it is installed.
• Other tangible personal property, where they are found at the time of the death of the deceased.
• Automobiles, boats, aircraft, etc., in the place where they are registered.
• Debts with real guarantee, in accordance with the regime that corresponds to the assets specially affected.
• Intangible assets not related to business or professional activity, including credits and debts, in the place of residence of the deceased. Included in that category are shares and social participations, bank accounts and deposits and legacies of money, among others.

What happens when the connection criteria cannot be determined, such as when there are properties located in a third country?

Well, they are outside the agreement and, therefore, they will be taxed in accordance with the general criteria, that is to say that in the case of residents in Spain they will be taxed in Spain due to personal obligation and they will have to integrate in the same tax base all the assets for which that are taxed, whether or not the agreement with France applies to them.

DOES THE SECOND LISD DA APPLY? The non-discriminatory principle was already included in the agreement itself, although it was expressed only in terms of deductions and allowances based on the personal and family situation of the taxpayer, which in practice has been assuming that in all cases of taxation in Spain by taxpayers residing in France, as they are by real taxation, the general rate of the State has been applied.

However, in my opinion, the transmissions that fall under the orbit of the agreement with France must be applied the criteria and norms contained in the second DA of the LISD in any case, for being a country belonging to the European Economic Area.

IS THE PROGRESSIVE RATE APPLIED ON THE INTEGRATED BASIS FOR ALL THE PROPERTIES THAT MUST BE TAXED IN SPAIN OR ON THE THEORETICAL BASIS WHICH WOULD INCLUDE ALL ASSETS?

The agreement provides for the possibility of each State applying the tax rate on the basis that corresponds to the assets that must be taxed in its territory, without prejudice to the fact that for its determination the assets that must be taxed in the other state are also included.

In the case of Spain, neither in the general state regulations nor in the regional regulations, which include provisions on the tax rate, is there a provision that determines the rate based on the theoretical taxable base (as, on the other hand, This is the case, in general, in the taxation of the dismemberment of the domain between bare ownership and usufruct).

SUMMARY TABLES

Once the application of the International Treaty with France has been determined (by the residence of the deceased), we can schematically summarize the presentation of the regulations that are applicable depending on the case. When there is an element of personal connection with Sweden, you have to look at the agreement with this other country

Abbreviations:

R-ESP: Resident in Spain

R-FRA: Resident in France

R-EEE: Resident in the European Union or another country of the European Economic Area, except Spain.

NR: Non-resident in EEA country

AN ASSUMPTIONS are MADE: French tax is levied on its residents for their entire world heritage.

APPLICABLE REGULATIONS IF THE CAUSER WAS RESIDENT IN SPAIN

CAUSING R-ESP	PLACE OF CORPORAL PROPERTY
TAXABLE RESIDENCE	SPAIN	FRANCE	REST EEA	OTHERS	INCORPORAL PROPERTY
R-ESP	SPAIN CA RESIDENCE CAUSE	FRANCE	SPAIN CA RESIDENCE CAUSE	SPAIN CA RESIDENCE CAUSE	SPAIN CA CAUSING RESIDENCE (Never pay taxes in France)
R-FRA	SPAIN CA RESIDENCE CAUSE	FRANCE	¿?????	¿????	SPAIN CA CAUSING RESIDENCE (only those that have to be carried out in ESP)
R-EEE	SPAIN CA RESIDENCE CAUSE	¿????	¿??????	¿??????	ESP ONLY THOSE THAT HAVE TO BE CARRIED OUT IN ESP (CAUSING CA)
NR	SPAIN STATE	¿????	¿??????	¿??????	ESP ONLY THOSE THAT HAVE TO BE CARRIED OUT IN ESP (STATE)
	THE SHADING INDICATES THE ASSUMPTIONS OF APPLICATION OF THE AGREEMENT

 

APPLICABLE REGULATIONS IF THE DEFENDER WAS A RESIDENT IN FRANCE

CAUSING R-FRA	PLACE OF CORPORAL PROPERTY
TAXABLE RESIDENCE	SPAIN	FRANCE	REST EEA	OTHERS	INCORPORAL PROPERTY
R-ESP	SPAIN CA > VALUE IN ESP	FRANCE	SPAIN CA > VALUE IN ESP (or SP residence)	SPAIN CA > VALUE IN ESP (or SP residence)	FRANCE only in those that are taxable there, rest in ESP
R-FRA	SPAIN CA > VALUE IN ESP	FRANCE	¿?????	¿????	FRANCE (Never in SPAIN)
R-EEE	SPAIN CA > VALUE IN ESP	¿????	¿??????	¿??????	CA > VALUE IN ESP (only those of ESP)
NR	SPAIN STATE	¿????	¿??????	¿??????	ESP ONLY THOSE THAT HAVE TO BE CARRIED OUT IN ESP (STATE)
	THE SHADING INDICATES THE ASSUMPTIONS OF APPLICATION OF THE AGREEMENT

THE AGREEMENT WITH SWEDEN

DETERMINATION OF THE CONNECTION POINTS OR CRITERIA

• Personal property and its accessories, the place where they are located. Participations in partnerships and civil partnerships are included to the extent that they correspond to real estate.
• Movable property integrated into a business or professional activity, in the place where it is installed.
• Other tangible personal property, where they are found at the time of the death of the deceased.
• The shares of a joint-stock company registered in one of the Contracting States in the state of the Registry, unless they are physically located in the other state.
• Other assets and rights, in the State of residence of the deceased.
• Debts directly related to the assets of the inheritance, in the place where said assets are taxed.

DOES THE SECOND LISD DA APPLY?

The principle of non-discrimination is included in the agreement, without necessity, therefore it was necessary for residents of Sweden to recognize the 2014 Supreme Court Judgment.

However, in my opinion, the criteria and rules contained in the second DA of the LISD apply to transmissions that fall under the orbit of the agreement with Sweden, in any case, because it is a country belonging to the European Economic Area.

IS THE PROGRESSIVE RATE APPLIED ON THE INTEGRATED BASIS FOR ALL THE PROPERTIES THAT MUST BE TAXED IN SPAIN OR ON THE THEORETICAL BASIS WHICH WOULD INCLUDE ALL ASSETS?

YES, in all cases, since the agreement provides that in each country the entire estate is included in the tax base and that part of the quota that corresponds to the assets that must be taxed in the other state is later considered as paid.

Work carried out by my colleague and friend Gerardo Mármol Llombart, and that he has given me to publish in this blog

In Lleida on October twenty-first, two thousand and seventeen